Three Elements of the Marketing Process as a Two-Factor Machine Ted Mitchell

A Basic Car The Car’s Conversion Process miles per gallon The Car’s Conversion Process miles per gallon gasoline Strange looking Car Miles Travelled gasoline Miles Travelled

Simple Models of A Car’s Performance as a Transportation Machine Input to the Car, IGasoline: Gallons, G Conversion rate, r = O/I Miles per gallon, r = mpg or M/G Output from the Car, O = r x I Distance travelled: Miles, M A better car and driver will get more miles for the same resources than a poorer car and driver.

Simple Models of A Car’s Performance as a Transportation Machine Inputs to the Car, IGasoline: Gallons, G Driving Time: Hours, H Conversion rate, r = O/I Miles per gallon, r = mpg = M/G Miles per Hour, r = mph = M/H Output from the Car, O = r x I Distance travelled: Miles, M Distance travelled, Miles, M A better car and driver will get more miles for the same resources than a poorer car and driver.

A Basic Marketing Machine Marketing Machine Cups sold per server Marketing Machine Cups sold per server It looks like A Two- Factor marketing machine Number of servers hired Profit from Cups of Coffee sold

Simple Models of Marketing Machine Performance Inputs to the Marketing Machine, I Number of Servers Hired: S Conversion rate, r = O/I Profits Returned per Server, Return on Servers r = Z/S Output from the Machine, O = r x I Dollars of Marketing Profits, Z A better marketing manager and machine will generate more dollars of profits than an average marketing machine and manager

Inputs to the Marketing Machine, I Number of Servers Hired: S Number of Store Hours, H Conversion rate, r = O/I Profits Returned per Server, Return on Servers r = Z/S Profits Returned per Hour, Return on Hours r = Z/H Output from the Machine, O = r x I Dollars of Marketing Profits, Z A better marketing manager and machine will generate more dollars of profits than an average marketing machine and manager Simple Models of Marketing Machine Performance

Called Two-Factor Machines The amount of output from the machine, O Is determined by Two Factors Factor #1) the amount of Input the machine uses, I Factor #2) the machine’s conversion rate or the efficiency of the machine’s ability to convert Inputs into Outputs, r = O/I

Many Types of Inputs Business Machines have many types of resources, investments and activities that can be considered Inputs for a marketing machine The Inputs for Marketing machines have been classified as the 4 P’s of the marketing mix Selling Price Product/Service mix Promotion/Communication mix (advertising, sales people, events) Time and Place mix (hours of operation, location, furnishings)

Many Types of Marketing Outputs Marketing machines can be designed to produce many different types of outputs Profit (Gross, Marketing Profit, Net Profit) Sales revenue Demand (quantity sold) Market penetration Customer Awareness Customer Satisfaction

Two-Factor Marketing Machines Are business machines on training wheels They deal with a single input and a single output. Changes in the output are explicitly due to the changes in the amount of a single input and the machine’s conversion rate All other marketing inputs are considered to be held constant when managing and evaluating a two-factor model of a marketing machine

We use Two-Factor Models to 1) Compare different marketing performances 2) Forecast the amount of output to be expected if the quantity of input is changed or the efficiency of the conversion process is changed

Comparing performances P1: Benchmark Performance P2: Your Biz Performance ∆P = P2-P1 Input: Number of Store Hours Open: H 100 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Output: Profit, Z = r x H $4,000 You need a benchmark performance for comparison

Comparing performances P1: Benchmark Performance P2: Your Biz Performance ∆P = P2-P1 Input: Number of Store Hours Open: H 100 hours110 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Profit per hour $38 per hour Output: Profit, Z = r x H $4,000$4,180 Remember the assumption that other things in the marketing mix are kept constant or are not sufficiently important to worry about

Comparing performances P1: Your initial performance P2: Your second Performance ∆P = P2-P1 Input: Number of Store Hours Open: H 100 hours110 hours∆H = 10 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Profit per hour $38 per hour ∆r = -$2 Output: Profit, Z = r x H $4,000$4,180∆Z = $180 In a computer simulation it is easy to keep things constant. Make your initial performance the benchmark and only change one Input on a repeated plays of the same period

Diagnoses of the Differences P1: Benchmark Performance P2: Your Biz Performance ∆P = P2-P1 Input: Number of Store Hours Open: H 100 hours110 hours∆H = 10 hours You are open for 10 hours longer Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Profit per hour $38 per hour ∆r = -$2 Your efficiency is $2 less profit per hour Output: Profit, Z = r x H $4,000$4,180∆Z = $180 Your profit is $180 higher The differences in the two overall performances provide the basis for a diagnoses of the strategy change

Diagnosing the difference leads to forecasting the potential consequences of changes

Forecasting the Amount of Output From a proposed change in Input Two-Factor Machine P1: Benchmark Performance P2: Forecasted performance Input: Number of Store Hours Open: H Conversion rate: Profit per Hour, r = Z/H Output: Profit, Z = r x H

Forecasting the Amount of Output From a proposed change in Input P1: Benchmark Performance P2: Forecasted performance Input: Number of Store Hours Open: H 100 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Output: Profit, Z = r x H $4,000

Forecasting the Amount of Output From a proposed change in Input P1: Benchmark Performance P2: Forecasted performance Input: Number of Store Hours Open: H 100 hoursProposed Amount of Input, I = 110 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Assumed conversion rate Profit per hour r = $40 per hour Output: Profit, Z = r x H $4,000Forecasted Profit, Z = r x H

Forecasting the Amount of Output From a proposed change in Input P1: Benchmark Performance P2: Forecasted performance Input: Number of Store Hours Open: H 100 hoursProposed Amount of Input, I = 110 hours Conversion rate: Profit per Hour, r = Z/H Profit per hour $40 per hour Profit per hour r = $40 per hour Output: Profit, Z = r x H $4,000Forecasted Profit, Z = $40 x 110 = Z = $4,400

Because of the Many different potential decisions That could be treated as marketing inputs It is important to have an understanding of potential cause and effect found in the theory of marketing management

Any Questions? Is every one comfortable with 1)the concept of the marketing process as a machine which converts the 4 P’s of marketing inputs into outputs of profits, revenues, etc.? 2) The Two-Factor Marketing Machine Converts a single metric as an input into a single metric output!