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CHAPTER
4
CONDUCTING
MARKETING RESEARCH
AND FORECASTING
DEMAND
LEARNING OBJECTIVES
After reading this chapter, students should:

Know what constitutes good marketing research

Know what are good metrics for measuring marketing productivity

Know how marketers can assess their returns on investment of marketing expenditures

Know how companies can more accurately measure and forecast demand
CHAPTER SUMMARY
Companies can conduct their own marketing research or hire other companies to do it for
them. Good marketing research is characterized by the scientific method, creativity, multiple
research methods, accurate model building, cost-benefit analysis, healthy skepticism, and an
ethical focus.
The marketing research process consists of defining the problem and research objective,
developing the research plan, collecting the information, analyzing the information, presenting
the findings to management, and making the decision.
In conducting research, firms must decide whether to collect their own data or use data that
already exists. They must also decide which research approach (observational, focus group,
survey, behavioral data, or experimental) and which research instruments (questionnaire or
mechanical instruments) to use. In addition, they must decide on a sampling plan and contact
methods.
Analysis should ensure that the company achieves the sales, profits, and other goals
established in its annual plan. The main tools are sales analysis, market-share analysis,
marketing expense-to-sales analysis, and financial analysis of the marketing plan.
Profitability analysis seeks to measure and control the profitability of various products,
territories, customer groups, trade channels, and order sizes. An important part of controlling
profitability is assigning costs and generating profit-and-loss statements.
There are two types of demand: market demand and company demand. To estimate current
demand, companies attempt to determine total market potential, area market potential,
industry sales, and market share. To estimate future demand, companies survey the buyers’
intentions, solicit companies’ sales force input, gather expert opinions, or engage in market
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testing. Mathematical models, advanced statistical techniques, and computerized data
collection procedures are essential to all types of demand and sales forecasting.
OPENING THOUGHT
To many of the students enrolled in marketing, the topics of statistics, analysis, and financial
modeling will cause their eyes to “roll in their heads” as the thought of calculating numbers
creates stress. The instructor is encouraged to emphasize to the students that good marketers
need good numbers in order to make good decisions.
Marketing research is primarily a quantitative process in which consumers’ thoughts, actions,
and purchase intensions are collected to form the basis of marketing decisions. As a result,
marketing research involves translating actions, or behavioral intentions to numbers. Most
students will relate to the more “exciting side” of marketing research—focus groups for
instance, but will shy away from the qualitative side of number crunching. If the analysis is
presented as a “means to an end” then the process should be accepted with greater enthusiasm.
In today’s world of marketing, marketing managers are increasingly being asked to justify
their expenditures. As a result, good marketing managers and good students of marketing
should be very comfortable with the statistical and financial analyses presented in this chapter.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, the students’ initial marketing
research parameters should be completed, demand forecasted, and target market selections
defined.
2. Commission a marketing research study on topic(s) of interest to the students at your
institution. During the course of the semester (15–16 week), have the students develop the
questionnaire, collection method, conduct the survey, and tabulate the results. The students
can be divided into groups for this project. Suggested topics can include the school or
university student’s opinions of campus issues such as the athletic program, sale of
alcohol, use of and availability of technology, or students’ perceptions of their current
education experiences.
3. Sonic PDA Marketing Plan Sonic has developed a sales forecast for its new PDA for
the next two years. Jane Melody wants to review estimates of industry demand for PDAs.
She also wants to develop an approach for measuring the effectiveness of Sonic’s
marketing efforts. She has asked you to:


Determine, from available secondary data, estimates of total demand for PDAs for the
next two years. She understands you will have to do Internet searches and determine
industry trade association sources for such data.
Look at the various ways to evaluate marketing effectiveness and recommend to her
the best way that Sonic can determine the effectiveness of its marketing efforts.
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Enter the answers to these questions in a written marketing plan or into the Sales
Forecasting and Controls sections of Marketing Plan Pro.
ASSIGNMENTS
Small Group Assignments
1. Query your college or university regarding what kind of research it conducts regarding
their student population and their competitive positioning versus other similar colleges and
universities. After collecting this data, analyze it according to the following criteria: Is it
current, accurate, specific, and applicable? Is this research composed of primary data,
secondary data, or a combination of both? What research company does the college or
university contract with for their research? Is the research based upon more quantitative or
qualitative research? Present these findings to the class in oral and written formats.
2. Ask students to contact a local marketing research firm in the area for the purpose of an
interview regarding research techniques, methods, and the difficulties in conducting
research. Pre-approve the set of questions prepared by the students prior to the
appointment. Ensure that the students will be able to collect information from the research
company regarding how information is collected. Once it is collected, what are some of
the difficulties faced by the researcher in presenting this information to the client?
Individual Assignments
1. In the Marketing Memo, Pros and Cons of Online Research, the author describes four
advantages and two disadvantages for conducting online research. Selecting online
research from the Web, each student is to comment on the “value” of this type of research
vis-à-vis the advantages and disadvantages of the marketing memo. Specifically, do the
negatives of online research, in their example, outweigh the positives? Can, and more
importantly, should marketers develop marketing strategies from just the findings of
online research? On the other hand, is more qualitative or quantitative research needed
before strategy is defined?
2. In the Marketing Memo, Questionnaire Dos and Don’ts, the author lists 12 ways to phrase
questions that will maximize unbiased responses. Prepare a set of questions (10–12
questions) for a hypothetical consumer products company trying to break into the toy
business. Make sure that your questions meet each one of these 12 criteria. Comment on
how easy or hard such question formatting is.
Think-Pair-Share
1. During the course of the semester, ask students to retain all customer surveys, satisfaction
surveys, or other types of research material sent to them, their parents, or others. Each
survey should be critiqued by the student for appropriateness, completion, bias, etc. per the
tenants outlined in this chapter. Why do these surveys contain errors?
2. In small groups, conduct a series of personal interviews with faculty members of your
college or university. The research should involve a specific topic (of the student’s
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choice). The students must gain approval from the instructor, via written presentation,
their types of questions, sample size, and sampling procedure prior to implementing their
interviews.
3. A second group of students can conduct the same research but must use either a mail
questionnaire, online, or telephone interview techniques. In a class presentation setting,
students should compare and contrast their findings based upon these two different
methodologies. Students should be prepared to answer some of these questions: Why is
the data different? Where is the data forming the same or similar conclusions? What were
the challenges to using each of these methods? What can be done in the future to minimize
these challenges?
MARKETING TODAY—CLASS DISCUSSION TOPICS
Research conducted by Purdue University shows that up to 75 percent of consumers fail to
complete their online purchases, primarily because of sluggish Web sites, poor site design, and
related factors. Seeking to learn what online visitors do and do not do at its Web site,
Northwest Airlines has added a new software tool to its online operations. “The success of our
online business comes down to our customers and how satisfied they are with our products
and services,” says Northwest’s manager of e-commerce. “This new tool,” he says, “makes it
very easy to determine where we should focus our efforts” by analyzing the online behavior of
visitors, finding out which affiliates send the most visitors to the site, and tracking response to
online promotions. With this information, the airline will be able to make the site function
more efficiently and more effectively to increase sales and customer satisfaction.
Browse Northwest’s home page (www.nwa.com) and then follow the link to the “Talk to Us”
page. Sample several of the links on this page to see how customers can submit questions and
feedback. Would such data be included as part of Northwest’s marketing information system,
marketing intelligence system, or marketing research system? Where would the airline store
the primary data about online visitor behavior that its new software tool is collecting? What
kind of research approach does this primary data represent? How else might Northwest use its
Web site to gather primary data?
Answer
Feedback and questions from online customers would be included as part of Northwest’s
marketing intelligence system, because this information concerns developments in the
marketing environment. The airline would store the primary data about online visitor behavior
in its data warehouse, specifically in its customer database. This research represents an
observational approach because it involves observing what customers do online.
Students may suggest numerous ways in which Northwest might use its Web site to gather
primary data. One sample response: Northwest could use cookies to track how often
customers visit the site, which pages they look at and for how long, how often their visits
culminate in purchases, how many leave in the middle of a purchase but before finalizing the
transaction, and other information.
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END-OF-CHAPTER SUPPORT
MARKETING DEBATE—What Is the Best Type of Marketing Research?
Many marketing researchers have their favorite research approaches or techniques, although
different researchers often have different preferences. Some researchers maintain that the only
way to really learn about consumers or brands is through indepth, qualitative research. Others
contend that the only legitimate and defensible form of marketing research involves
quantitative measures.
Take a position: Marketing research should be quantitative versus marketing research should
be qualitative.
Suggested Response
Pro: People are complex in their buying habits and purchase decision-making. Consumers, do
not always have the capacity to voice, or understand how they decide to purchase a particular
product or service. As a result, good marketing research should delve into the consumers’
“purchase decision trees” to understand hidden motivations and influences. Good qualitative
research may undercover hidden purchase agendas, hidden uses for the product, or hidden
opportunities for new, yet undeveloped products. Because of the freedom afforded to both
researchers in their probes and consumers in their responses, qualitative research can often be
a useful step in exploring consumers’ brand and product perceptions.
The drawbacks of quantitative research, which include selection bias, response bias, and nonresponse, will always allow this type of research to be criticized for such shortcomings and
their results discounted. Qualitative research, although having its own sets of disclaimers,
closely describes the actions of consumers—that is what marketing is all about in the first
place—to get someone to purchase something.
Con: Quantitative research is the only accepted method of marketing research that can be
scientifically defended. Quantitative research methods, techniques, and modeling have
advanced substantially in recent years. Along with these advancements in techniques,
quantitative research has improved in its predictability and accuracy due to more sophisticated
mathematical processes. Quantitative research is also the most economically and timely
research available today. With quantitative research, there is secondary data that can quickly
be accessed further reducing time and cost considerations. As the world increases in its “speed
of information” and “speed of living,” quick, accurate information becomes essential for a
marketer to possess.
With the proper framing of the research assignment and the proper set of specific research
objectives, quantitative research is the most efficient method to gather the necessary
information in the shortest time for the lowest cost.
MARKETING DISCUSSION
When was the last time you participated in a survey? How helpful do you think the
information was you provided? How could the research have been done differently to make it
more effective?
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Suggested Response
Individual student answers will depend upon the survey chosen, however, the students
should frame their responses in terms of some of the main topics of this chapter
MARKETING SPOTLIGHT—Sony
Discussion Questions:
1) What have been the key success factors for SONY?
a. SONY has three types of creativity: to make inventions, creativity in
product planning and production, and creativity in marketing.
b. Creativity in marketing means deep insight into its customers.
c. SONY also carefully measures the effectiveness of each campaign by pretesting these campaigns.
d. Sony’s Gen Y youth marketing efforts with its online program promoting
the Internet usage and tracking the respondents “click-throughs.”
2) Where is SONY vulnerable?
a. In its belief that the next wave of consumer electronics will come from the
integration of numerous devices networked and linked together.
b. A lapse of marketing research caused by corporate changes or financial
setbacks.
c. Corporate complacency due to success.
3) What should it watch out for?
a. The effectiveness of its marketing research in identifying emerging trends.
b. The temptation to expand into other consumer products outside of its core
competencies.
4) What recommendations would you make to senior marketing executives going
forward?
a. Accept your competencies, accept your limitations, and capitalize on your
strengths.
b. Continue to believe that marketing research is the underlying foundation
of your product development processes and marketing successes.
5) What should they be sure to do with their marketing?
a. Continue to target their marketing to identify those segments of the total
market that are receptive to new and innovative products and ideas.
b. Concentrate on the next generation of consumers—the Millenniums and
conduct research into what type of consumers this group is and will
become.
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DETAILED CHAPTER OUTLINE
In addition to monitoring a changing marketing environment, marketers also need to
develop specific knowledge about their particular markets. Good marketers want
information to help them interpret past performance as well as plan future activities.
Marketers need timely, accurate, and actionable information on consumers,
competition, and their brands.
MARKETING RESEARCH SYSTEM
Marketing managers often commission formal marketing studies of specific problems
and opportunities.
A) They may request a(n):
1) Market survey.
2) Product-preference test.
3) Sales forecast by region.
4) Advertising evaluation.
B) It is the job of the marketing researcher to produce insight into the customer’s attitudes
and buying behavior.
C) We define marketing research as the systematic design, collection, analysis, and
reporting of data and findings relevant to a specific marketing situation facing the
company.
D) Most large companies have marketing research departments.
E) At smaller companies, marketing research is often carried out by everyone in the
company.
F) Companies normally budget marketing research at one to two percent of company
sales.
G) Marketing research firms fall into three categories:
1) Syndicated-service research firms.
2) Custom marketing research firms.
3) Specialty-line marketing research firms.
H) Small companies can hire the services of a marketing research firm or conduct
research in creative and affordable ways, such as:
1) Engaging students or professors to design and carry out projects.
2) Using the Internet.
3) Checking out rivals.
I) Most companies use a combination of marketing research resources to study
industries, competitors, audiences, and channel strategies.
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Review Key Definitions here: marketing research, syndicated-service research firms,
custom marketing research firms, and specialty-line marketing research firms
THE MARKETING RESEARCH PROCESS
Effective marketing research involves six steps.
Figure 4.1 shows these six steps.
Step 1: Define the Problem, the Decision Alternatives, and the Research
Objectives
Marketing management must be careful not to define the problem too broadly or too
narrowly for the marketing researcher.
A) Some research is exploratory—its goal is to shed light on the real nature of the
problem and to suggest possible solutions or new ideas.
B) Some research is descriptive—it seeks to ascertain certain magnitudes.
C) Some research is causal—its purpose is to test a cause-and-effect relationship.
Step 2: Develop the Research Plan
The second stage of the marketing research calls for developing the most efficient plan
for gathering the needed information.
A) The marketing manager needs to know the cost of the research plan before approving
it.
B) Designing a research plan calls for decisions on the:
1) Data sources.
2) Research approaches.
3) Research instruments.
4) Sampling plan.
5) Contact methods.
Data Sources
The research can gather secondary data, primary data, or both.
A) Secondary data are data that were collected for another purpose and already exist.
B) Primary data are data freshly gathered for a specific purpose or for a specific research
project.
C) Researchers usually start out their investigation by examining secondary data.
D) Secondary data provides a starting point and offers the advantages of low cost and
ready availability.
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E) Most marketing research projects involve some primary data collection.
Review Key Definitions here: secondary data and primary data
Research Approaches
Primary data can be collected in five main ways: through observation, focus groups,
surveys, behavioral data, and experiments.
Observational Research
A) Fresh data can be gathered by observing the relevant actors and settings.
Focus Group Research
A) A focus group is a gathering of six to ten people who are carefully selected based on
certain demographic, psychographic, or other considerations and brought together to
discuss various topics of interest at length.
B) A professional research moderator provides questions and probes based on a
discussion guide or agenda to ensure that the right material gets covered.
C) Moderators attempt to track down potentially useful insights as they try to discern the
real motivations of consumers and why they are saying and doing certain things.
D) The sessions are typically recorded.
Survey Research
Companies undertake surveys to learn about people’s knowledge, beliefs, preferences,
and satisfaction, and to measure these magnitudes in the general population.
Behavioral Data
Customers leave traces of their purchasing behavior in store scanning data, catalog
purchases, and customer databases. Much can be learned by analyzing these data.
A) Customers’ actual purchases reflect preferences and often are more reliable than
statements offered to marketing researchers.
Experimental Research
The most scientifically valid research is experimental research.
A) The purpose of experimental research is to capture cause-and-effect relationships by
eliminating competing explanations of the observed findings.
B) Experiments call for:
1) Selecting matched groups of subjects.
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2) Subjecting them to different treatments.
3) Controlling extraneous variables.
4) Checking whether observed response differences are statistically significant.
Research Instruments
Marketing researchers have a choice of three main research instruments in collecting
primary data: questionnaires, qualitative measures, and mechanical devices.
Questionnaires
A questionnaire consists of a set of questions presented to respondents.
A) Because of its flexibility, the questionnaire is by far the most common instrument used
to collect primary data.
B) Questionnaires need to be carefully developed, tested, and debugged before being
administered.
1) The researcher carefully chooses the questions, wording, and sequence.
2) The form of the question can influence the response.
3) Marketing researchers used both closed-end and open-end questions.
Table 4.1 provides examples of both types of questions.
Qualitative Measures
Some marketers prefer more qualitative methods for gauging consumer opinions
because consumer actions do not always match their answers to survey questions.
A) Qualitative research techniques are relatively unstructured measurement approaches
that permit a range of possible responses.
B) Qualitative research techniques are a creative means of ascertaining consumer
perceptions that may otherwise be difficult to uncover.
C) Because of the freedom afforded both researchers in their probes and consumers in
their responses, qualitative research can often be a useful first step in exploring
consumers’ brand and product perceptions.
D) There are also drawbacks to qualitative research:
1) The indepth insights have to be tempered by the fact that the sample size is
limited.
2) Question of interpretation.
Review Key Definitions here: focus groups and qualitative research techniques
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Mechanical Devices
Mechanical devices are occasionally used in marketing research.
A) Galvanometers.
B) Tachistoscope.
C) Audiometers.
Sampling Plan
After deciding on the research approach and instruments, the marketing researcher
must design a sampling plan. This calls for three decisions:
A) Sampling unit: Who is to be surveyed? Define the target population that will be
sampled.
B) Sample size: How many people should be surveyed? Large samples give more
reliable results than small samples.
C) Sampling procedure: How should the respondents be chosen? Probability sampling
allows the calculation of confidence limits for sampling error.
Table 4.2, part A shows the three types of probability sampling.
Table 4.2, part B, describes three types of non-probability samples.
Contact Methods
Once the sampling plan has been determined, the marketing researcher must decide
how the subject should be contacted: mail, telephone, personal, or online interview.
Mail Questionnaire
The mail questionnaire is the best way to reach people who would not give personal
interviews or whose responses might be biased or distorted by the interviewers.
A) Mail questionnaires require simple and clearly worded questions.
B) The response rate is usually low and/or slow.
Telephone Interviews
Telephone interviewing is the best method for gathering information quickie.
A) The interviewer is also able to clarify questions if respondents do not understand them.
B) The response rate is typically higher than in the case of mailed questionnaires.
C) The main drawback is that the interviews have to be short and not too personal.
D) The “Do Not Call” registry.
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Personal Interview
Personal interviewing is the most versatile method.
A) The interviewer can ask more questions and record additional observations about the
respondent.
B) It is the most expensive method.
C) Subject to interviewer bias or distortion.
D) Personal interviewing takes two forms:
1) Arranged interviews.
2) Intercept interviews.
Review Key Definitions here: arranged and intercept interviews
Online Interview
There is an increase in the use of online methods. There are so many ways to use the
“Net” to do research.
A) A company can include a questionnaire on its Web site.
B) Place a banner on some frequently visited site such as Yahoo!
C) The company can sponsor a chat room or bulletin board.
D) Host a real-time panel or virtual focus group.
E) Learn about how individuals who visit its site by following how they clickstream
through the Web site.
F) Online product testing is also growing and providing information much faster than
traditional marketing research techniques used to develop new products.
Step 3: Collect the Information
The data collection phase of marketing research is generally the most expensive and the
most prone to error.
A) In the case of survey, four major problems arise:
1) Some respondents will not be at home and must be contacted again and again.
2) Other respondents will refuse to cooperate.
3) Others will give biased or dishonest answers.
4) Some interviewers will be biased or dishonest.
B) Data collection methods are rapidly improving thanks to computers and
telecommunications.
C) Some research firms interview from a centralized location and enter information
directly into a computer.
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Step 4: Analyze the Information
The next-to-last step in the process is to extract findings from the collected data. The
researcher tabulates the data and develops frequency distributions.
A) Averages and measures of dispersion are computed for the major variables.
B) The researcher will also apply some advanced statistical techniques and decision
models in hope of discovering additional findings.
Step 5: Present the Findings
The researcher should present findings that are relevant to the major marketing
decisions facing management.
Step 6: Make the Decision
The managers who commissioned the research need to weigh the evidence.
Table 4.3 summarizes the seven characteristics of good marketing research.
A) A growing number of organizations are using a marketing decision support system to
help marketing mangers make better decisions.
B) A marketing decision support system (MDSS) is defined as a coordinated collection
of data, systems, tools, and techniques with supporting software and hardware, by
which, an organization gathers, interprets relevant information from business and
environment, and turns it into a basis for marketing action.
C) A classic example is the CALLPLAN model that helps salespeople determine the
number of calls to make, per period, to each prospect and current clients.
Review Key Definitions here: marketing decision support system
Overcoming Barriers to the Use of Marketing Research
In spite of the rapid growth of marketing research, many companies still fail to use it
sufficiently or correctly, for several reasons:
A) A narrow conception of the research.
B) Uneven caliber of researchers.
C) Poor framing of the problem.
D) Late and occasionally erroneous findings.
E) Personality and presentational differences.
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MEASURING MARKETING PRODUCTIVITY
An important task of marketing research is to assess the efficiency and effectiveness of
marketing activities.
A) Marketers, increasingly, are being held accountable for their investments and must be
able to justify marketing expenditures to senior management.
B) Marketing research can help address this increased need for accountability.
C) Two complementary approaches to measure marketing productivity are:
1) Marketing metrics to assess marketing effects.
2) Marketing mix modeling to estimate causal relationships and how marketing
activities affects outcomes.
Marketing Metrics
Marketing metrics is a set of measures that help firms to quantify, compare, and
interpret marketing performance.
A) Marketing metrics can be used by brand managers to design marketing programs.
B) Marketing metrics can be used by senior managers to decide on financial allocations.
C) Many marketing metrics relate to customer-level concerns such as their attitudes and
behavior.
D) Others relate to brand-level concerns such as market share, relative price premium, or
profitability.
Table 4.4 is a sample marketing metrics .
E) Firms are also employing organizational processes and systems to make sure that the
value of all of these different metrics is maximized by the firm.
F) A summary set of relevant internal and external measures can be assembled in a
marketing dashboard for synthesis and interpretation.
G) As input to the marketing dashboard, companies can prepare two market-based
scorecards that reflect performance and provide possible early warning signals.
H) A customer-performance scorecard records how well the company is doing year after
year on such customer-based measures.
1) Norms should be set for each measure.
Table 4.5 shows such customer-based measures.
I) The second measure is called a stakeholder-performance scorecard.
1) Again, norms should be set for each measure and management should take action
when performance falls outside of these norms.
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Measuring Marketing Plan Performance
Marketers today have better marketing metrics for measuring the performance of
marketing plans. They can use four tools to check on plan performance: sales analysis,
market-share analysis, marketing expense-to-sales analysis, and financial analysis.
Sales Analysis
Sales analysis consists of measuring and evaluating actual sales in relation to goals.
Two specific tools are used in sales analysis.
A) Sales-variance analysis measures the relative contribution of different factors to a gap
in sales performance.
B) Microsales analysis looks at specific products, territories, and so forth that failed to
produce expected sales.
Review Key Definitions here: marketing metrics, marketing dashboard, customerperformance scorecard, stakeholder-performance scorecard, sales-variance analysis,
and microsales analysis
Market-Share Analysis
Company sales do not reveal how well the company is performing relative to
competitors. For this purpose, management needs to track its market share. Market
share can be measured in three ways:
A) Overall market share is the company’s sales expressed as a percentage of total market
share.
B) Served market share is its sales expressed as a percentage of the total sales to its
served market.
1) Its served market is all the buyers who are able and willing to buy the product.
2) Served market share is always larger than overall market share.
C) Relative market share can be expressed as market share in relation to its largest
competitor.
D) Conclusions from market share analysis are subject to certain qualifications:
1) The assumption that outside forces affect all companies in the same way is often
not true.
2) The assumption that a company’s performance should be judged against the
average performance of all companies is not always valid.
3) If a new firm enters the industry, then every existing firm’s market share might
fall.
4) Sometimes a market-share decline is deliberately engineered to improve profits.
5) Market share can fluctuate for many minor reasons.
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E) A useful way to analyze market-share movement is in terms of four components:
Overall
Market
Share
=
Customer X Customer X Customer X Price
penetration
loyalty
selectivity selectivity
Where:
1) Customer penetration is the percentage of all customers who buy from the
company.
2) Customer loyalty is the purchases from the company by its customers expressed as
a percentage of their total purchases from all suppliers of the same products.
3) Customer selectivity is the size of the average customer purchase from the
company expressed as a percentage of the size of the average customer purchase
from an average company.
4) Price selectivity is the average price charged by the company expressed as a
percentage of the average price charged by all companies.
Marketing Expense-to-Sales Analysis
Annual plan control requires making sure that the company is not overspending to
achieve its goals.
A) The key ratio to watch is marketing expense-to-sales ratio.
B) The period-to-period fluctuations in each ratio can be tracked on a control chart.
Figure 4.2 shows a control chart.
C) The behavior of successive observations even within the upper and lower control
limits should be watched.
D) Note that in Figure 4.2 the level of expense-to-sales ratio rose steadily from the ninth
period onward.
Financial Analysis
The expense-to-sales ratios should be analyzed in an overall financial framework to
determine how and where the company is making its money. Marketers are increasingly
using financial analysis to find profitable strategies beyond sales building.
A) Management uses financial analysis to identify factors that affect the company’s rate
of return on net worth.
Figure 4.3 shows the main factors of financial control.
B) The return on net worth is the product of two ratios, the company’s return on assets,
and its financial leverage.
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C) The return on assets is the product of two ratios, the profit margin, and the asset
turnover.
D) The marketing executive can seek to improve performance in two ways:
1) Increase the profit margin by increasing sales or decreasing costs.
2) Increase the asset turnover by increasing sales or reducing assets that are held
against a given level of sales.
Review Key Definitions here: overall market sales, served market share, relative market
share, customer penetration, customer loyalty, customer selectivity, price selectivity,
marketing expense-to-sales ratio, control chart, rate of return on net worth, return on
assets, financial leverage, profit margin, and asset turnover
Profitability Analysis
A) Companies should measure the profitability of:
1) Products.
2) Territories.
3) Customer groups.
4) Segments.
5) Trade channels.
6) Order sizes.
B) This information can help management determine whether any products or marketing
activities should be expanded, reduced, or eliminated.
Marketing-Profitability Analysis
Table 4.6 shows the P&L statement for the lawnmower example.
Step 1: Identifying Functional Expenses
A) Assume that the expenses listed in Table 4.6 are incurred to sell the product, advertise
it, pack and deliver it, and bill and collect for it.
B) The first task is to measure how much of each expense was incurred in each activity.
Table 4.7 shows the allocation of the salary expense to these four activities.
Step 2: Assigning Functional Expenses to Marketing Entities
A) The next task is to measure how much functional expense was associated with selling
through each type of channel.
Table 4.8 shows the amount of sales made in each channel.
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B) Advertising expense can be averaged across all one hundred ads.
C) Packaging and delivery expense is allocated according to the number of orders placed
by each type of channel, the same for billing, and collection expenses.
Step 3: Preparing a Profit and Loss Statement for Each Marketing Entity
A profit-and-loss statement can now be prepared for each type of channel.
Table 4.9 shows this profit and loss statement per channel.
A) Table 4.9 shows that the firm is losing money through the garden supply stores and is
making almost all of its money from the department stores.
Determining Corrective Action
In general, marketing-profitability analysis indicates the relative profitability of
different channels, products, territories, or other marketing entities.
Direct Versus Full Costing
Like all information tools, marketing-profitability analysis can lead or mislead
marketing executives, depending on how well they understand its methods and
limitations.
A) The issue of whether to allocate full costs or only direct and traceable costs in
evaluating a marketing entity’s performance is a far more serious judgmental element
affecting profitability analysis.
B) Three types of costs have to be distinguished:
1) Direct costs—these are costs that can be assigned directly to the proper marketing
entities.
2) Traceable common costs—these are costs that can be assigned only indirectly, but
on a plausible basis to the marketing entities.
3) Non-traceable common costs—these are common costs whose allocation to the
marketing entities is highly arbitrary.
C) No one disputes including direct costs in marketing cost analysis.
D) There is a small amount of controversy about including traceable common costs.
E) The major controversy concerns whether the non-traceable common costs should be
allocated to the marketing entities.
1) Such allocation is called the full-cost approach and it argues that all costs must
ultimately be imputed in order to determine true profitability.
2) This argument confuses the use of accounting for financial reporting with its use
for managerial decision-making.
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F) Full costing has three major weaknesses:
1) The relative profitability of different marketing entities can shift radically when
one arbitrary way to allocate non-traceable common costs is replaced by another.
2) The arbitrariness demoralizes managers, who feel that their performance is judged
adversely.
3) The inclusion of non-traceable common costs could weaken efforts at real cost
control.
G) Companies are showing a growing interest in using marketing-profitability analysis or
its broader version, activity-based cost accounting (ABC), to quantify the true
profitability of different activities.
H) The contribution of ABC is to refocus management’s attention away from using only
labor or material standard costs to allocate full cost, and toward capturing the actual
costs of supporting individual products, customers, and other entities.
Review Key Definitions here: direct costs, traceable common costs, non-traceable
common costs, and full-cost approach
Marketing Mix Modeling
Marketing mix models analyze data from a variety of sources to understand more
precisely the effects of specific marketing activities.
A) Multivariate analyses are conducted to sort through how each marketing element
influences marketing outcomes of interest such as brand sales or market share.
B) The findings from marketing mix modeling are used to allocate or reallocate
expenditures.
C) Although marketing mix modeling helps to isolate effects, it is less effective at
assessing how different marketing elements work in combination.
FORECASTING AND DEMAND MEASUREMENT
One major reason for undertaking marketing research is to identify market
opportunities. Once the research is complete, the company must measure and forecast
the size, growth, and profit potential of each market opportunity.
A) Sales forecasts are used by finance to raise the needed cash for investment and
operations.
B) By the manufacturing department to establish capacity and output levels.
C) By purchasing to acquire the right amount of supplies.
D) By human resources to hire the needed number of workers.
E) Sales forecasts are based on estimates of demand.
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Measures of Market Demand
Companies can prepare as many as 90 different types of demand estimates.
Figure 4.4 Ninety Types of Demand
A) Demand can be measured for six different product levels.
B) Five different space levels.
C) Three different time levels.
D) Each demand measure serves a specific purpose.
E) Forecasts also depend on which type of market is being considered.
F) The size of the market hinges on the number of buyers who might exist for a particular
market offer.
G) The potential market is the set of consumers who profess a sufficient level of interest
in a market offer.
H) The available market is the set of consumers who have interest, income, and access to
a particular offer.
I) The target market is the part of the qualified available market the company decides to
pursue.
J) The penetrated market is the set of consumers who are buying the company’s
product.
K) These definitions are a useful tool for market planning.
1) If the company is not satisfied with its current sales it can:
a. Attract a larger percentage of buyers from its target market.
b. Lower the qualifications of potential buyers.
c. Expand its available market by opening distribution elsewhere or lower its
price.
d. Reposition itself in the minds of its customers
Review Key Definitions here: potential market, available market, target market, and
penetrated market
A Vocabulary for Demand Measurement
The major concepts in demand measurement are market demand and company
demand. Within each, we distinguish among a demand function, a sales forecast, and
potential.
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Market Demand
The marketer’s first step in evaluating marketing opportunities is to estimate total
market demand.
A) Market demand for a product is the total volume that would be bought by a defined
customer group, in a defined geographical area, in a defined time period, in a defined
marketing environment, under a defined marketing program.
B) Market demand is not a fixed number, but rather a function of the stated conditions.
C) For this reason, it can be called the market demand function.
Figure 4.5 (a) shows the underlying conditions of the dependence of total market
demand.
D) The horizontal axis shows different possible levels of industry marketing expenditure
in a given time period.
E) The vertical axis shows the resulting demand level.
F) The curve represents the estimated market demand associated with varying levels of
industry marketing expenditure.
G) Some base sales (called the market minimum) would take place without any demandstimulating expenditures.
H) Higher levels of industry marketing expenditures would yield higher levels of demand,
first at an increasing rate, then at a decreasing rate.
I) Marketing expenditures beyond a certain level would not stimulate much further
demand, thus suggesting an upper limit to market demand called the market potential.
J) The distance between the market minimum and the market potential shows the overall
marketing sensitivity of demand.
K) An expansible market is very much affected in its total size by the level of industry
marketing expenditures.
L) A non-expansible market is not much affected by the level of marketing expenditures.
1) Organizations selling in an non-expansible market must accept the market’s
size and direct efforts to winning a larger market share for its products.
M) The comparison of the current level of market demand to the potential demand level is
called the market penetration index.
1) A low market penetration index indicates substantial growth potential for the firm.
2) A high market penetration index suggests that there will be increased costs in
attracting the few remaining prospects.
3) Generally, price competition increases and margins fall when the market
penetration index is high.
N) A company should also compare its current market share to its potential market share,
called share penetration index.
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1) A low share penetration index indicates that the company can greatly expand its
share.
2) A firm should calculate the share penetration increases that would occur with
investments to see which investments would produce the greatest improvement in
share penetration.
O) It is important to remember that the market demand function is not a picture of market
demand over time.
P) Rather, the curve shows alternative current forecasts of market demand associated
with alternative possible levels of industry marketing effort in the current period.
Review Key Definitions here: market demand, market demand function, market
minimum, market potential, marketing sensitivity of demand, expansible market, nonexpansible market, market share, market penetration index, and share penetration
index
Market Forecast
Only one level of industry marketing expenditure will actually occur. The market
demand corresponding to this level is called the market forecast.
Market Potential
The market forecast shows expected market demand, not maximum market demand.
For the latter, we have to visualize the level of market demand resulting from a “very
high” level of industry marketing expenditure.
A) Market potential is the limit approached by market demand as industry marketing
expenditures approach infinity for a given marketing environment.
B) The phrase “for a given market environment” is crucial.
1) Companies cannot do anything about the position of the market demand function
but each can influence its particular location on the function when it decides how
much to spend on marketing.
Figure 4.5 (b) Market Demand Functions
C) Companies interested in market potential have a special interest in the product
penetration percentage that is the percentage of ownership or use of a product or
service in a population.
D) Companies assume that the lower the product penetration percentage, the higher the
market potential; assuming everyone will eventually be in the market for every
product.
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Company Demand
A) Company demand is the company’s estimated share of market demand at alternative
levels of company marketing effort in a given time period.
B) The company’s share of market demand depends on how its products, prices,
communications, services, and so on are perceived relative to competitors.
C) All things equal, the company’s market share would depend on the size and
effectiveness of its market expenditures relative to competitors.
Company Sales Forecast
A) The company sales forecast is the expected level of company sales based on a chosen
marketing plan and an assumed marketing environment.
Figure 4.5 shows the company sales on the vertical axis and the company marketing
effort on the horizontal axis.
B) The company sales forecast does not establish a basis for deciding what to spend on
marketing.
C) On the contrary, the sales forecast is a result of an assumed marketing expenditure
level.
D) A sales quota is the sales goal set for a product line, company division, or sales
representative.
E) A sales budget is a conservative estimate of the expected volume of sales and is used
primarily for making current purchasing, production, and cash flow decisions.
F) The sales budget is based on the sales forecast and is generally set slightly lower than
the sales forecast.
Review Key Definitions here: market potential, product penetration percentage,
company demand, company sales forecast, sales quota, sales budget
Company Sales Potential
Company sales potential is the sales limit approached by company demand as the
company marketing effort increases relative to that of competitors.
A) The absolute limit of company demand is the market potential.
B) In most cases, company sales potential is less than market potential.
1) Each competitor has a hard core of loyal buyers who are not very responsive to
other companies’ efforts to woo them.
Estimating Current Demand
Marketing executives want to estimate total market potential, area market potential, and
total industry sales and market shares.
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Total Market Potential
Total market potential is the maximum amount of sales that might be available to all the
firms in an industry during a given period, under a given level of industry marketing
effort and environmental conditions.
A) A common way to estimate total market potential is:
1) Estimate the potential number of buyers X.
2) The average quantity purchased by a buyer X.
3) The price paid.
B) The most difficult component to estimate is the number of buyers for the specific
product or market.
C) A variation is called the chain-ration method, which involves multiplying a base
number, by several adjusting percentages.
Area Market Potential
Companies face the problem of selecting the best territories and allocating marketing
budget optimally among these territories.
A) Therefore, it needs to estimate the market potential of different cities, states, and
nations.
B) Two major methods of assessing area market potential are:
1) The market-buildup method that is used by business marketers.
2) The multiple-factor index that is used primarily by consumer marketers.
Market-Buildup Method
A) The market-buildup method calls for identifying all the potential buyers in each
market and estimating their potential purchases.
B) This method produces accurate results if we have a list of all potential buyers and a
good estimate of what each will buy.
C) An efficient method of estimating area market potentials makes use of the North
American Industry Classification System (NAICS).
Multiple-Factor Index Method
A) The method most commonly used in consumer markets is a straightforward index
method.
B) A single factor is rarely a complete indicator of sales opportunities thus it makes sense
to develop a multiple-factor index, with each factor assigned a weight.
C) Many companies compute other area indexes as a guide to allocating marketing
resources.
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Table 4.10 shows the percentage of U.S. brand and category sales and column 3 shows
the BDI.
D) The brand development index (BDI) that is an index of brand sales to category sales.
E) After the company decides on the city-by-city allocation of its budget, it can refine
each city allocation down to census tracts or zip+4 code centers.
F) Census tracts are small, locally defined statistical areas in metropolitan areas and
some other countries.
G) Data on population size, median family income, and other demographic information is
available for these units.
Industry Sales and Market Shares
Besides estimating total potential and area potential, a company needs to know the
actual industry sales taking place in its market. This means identifying competitors and
estimating sales.
A) The industry trade association will often collect and publish total industry sales.
1) With this information, a company can evaluate its performance against the whole
industry.
B) Another way to estimate sales is to buy reports from a marketing research firm that
audits total sales and brand sales.
1) These audits give the company valuable information about its total productcategory sales as well as brand sales.
2) It can compare its performance to the total industry or any particular competitor to
see whether it is gaining or losing share.
C) Business goods marketers typically have a harder time estimating industry sales and
market shares than consumer goods marketers, and will therefore operate with less
knowledge of their market share results.
Estimating Future Demand
Very few products or services lend themselves to easy forecasting. In most markets, total
demand and company demand are not stable. Good forecasting becomes a key factor in
company success. The more unstable the demand, the more critical is forecast accuracy,
and the more elaborate is forecasting procedure.
A) Companies generally use a three-stage procedure to prepare a sales forecast.
1) They prepare a macroeconomic forecast.
2) An industry forecast.
3) Company sales forecast.
B) Companies can do forecasts internally or buy forecasts from outside sources.
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C) All forecasts are built on one of three information bases:
1) What people say.
2) What people do.
3) What people have done.
Survey of Buyers’ Intentions
Forecasting is the art of anticipating what buyers are likely to do under a given set of
conditions. Because buyer behavior is so important, buyers should be surveyed.
A) A purchase probability scale asks the buyers intentions within a given time period,
like a year.
B) For business, buying firms can carry out buyer-intention surveys regarding capital
equipment.
C) A “grassroots” forecasting procedure details estimates broken down by product,
territory, customer, and sales rep.
Composite of Sales Force Opinions
Each sales representative estimates how much each current and prospective customer
will buy of each of the company’s products
Expert Opinion
Companies can obtain forecasts form experts, including dealers, distributors, suppliers,
marketing consultants, and trade associations.
A) Many companies buy economic and industry forecasts from well-known economicforecasting firms.
B) Occasionally, companies will invite a group of experts to prepare a forecast.
1) Group-discussion method.
2) Pooling of individual estimates.
3) Delphi method.
Past Sales Analysis
Sales forecasts can be developed on the basis of past sales.
A) Time-series analysis consists of breaking down past time series into four components:
1) Trend.
2) Cycle.
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3) Seasonal.
4) Erratic and projecting these components into the future.
B) Exponential smoothing consists of projecting the next period’s sales by combining an
average of past sales and the most recent sales, giving more weight to the latter.
C) Statistical demand analysis consists of measuring the impact level of each of a set of
causal factors on the sales level.
D) Econometric analysis consists of building sets of equations that describe a system,
and proceeding to fit the parameters statistically.
Market Test Method
When buyers do not plan their purchases carefully or experts are not available or
reliable, a direct-market test is desirable.
A) A direct-market test is especially desirable in forecasting new product sales or
established product sales in a new distribution channel or territory.
Review Key Definitions here: total market potential, area market potential, total
industry sales, chain-ration method, purchase probability scale, time-series analysis,
exponential smoothing, statistical demand analysis, econometric analysis, and directmarket test
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