research decisions and the value of marketing information the meaning of “limited by budget and...
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Research Decisions and the Value of Marketing Information
The meaning of “limited by budget and time constraints.”
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Value of Marketing Research
• Estimating gains from the “right” marketing decisions, developing market forecasts.
• Framing marketing decisions and the value of information.
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Overlapping Information Needs
• Planning: Market Opportunity Analysis
• Implementation: Refining Marketing Actions
• Control: Monitoring
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Forecasts vs. Potential
• Market Potential: Sales of all competitors, if all gave maximal marketing efforts.
• Market Forecast: Sales of all competitors if competitors gave historic effort.
• Sales Potential: Sales of your firm, with maximal effort, maximal market share ever.
• Sales Forecast: Sales of a firm given projected efforts.
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Forecasts vs. Potential
• “Market Potential” is a frequently used expression, but is an “upper limit” of consumer expenditure with maximum marketing efforts.
• “Market Forecast” is a more realistic projection of consumer expenditure with current competitive efforts.
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Women in the U.S.
35 to 39 years 11,387,968
40 to 44 years 11,312,761
45 to 49 years 10,202,898
50 to 54 years 8,977,824
55 to 59 years 6,960,508
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Conversion Factors
• Market forecasts convert population and household counts for geographic areas into estimates of:– Number of buyers
– Sales for a particular product category, or consumer expenditures
• Sales forecasts convert market forecasts into share of the market or sales for a particular brand
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Placing a Value on a Sales Forecast
• Contribution Margin
• Discounted Time Stream
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Market research should be conducted only when the expected value of information to be obtained exceeds the costs of obtaining it.
What then, is the value of information?
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Value of perfect information:
Expected payoffs under uncertainty
• Choose between 40% probability of scoring two points, versus
• 98% probability of scoring one point.
• Expected payoffs are .80 versus .98, respectively.
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.98 “kick”
.40 “go for two”
1 point
2 points
“kick”
“go for two”
.98 point
.80 point
Decision Tree
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98 “kick”
.80 “go for two”
1 point
2 points
“kick”
“go for two”
.98 point
1.6 points
Decision Tree with research
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Framing research costs:Expected value of perfect information equals:
• The value of information under certainty (gained from market research) ...
• minus the value of information under uncertainty (operating without market research, trial and error,“learn by doing.”)
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1.0 Success
.
$4 millionIntroduce “A”
Do notintroduce
Case A1
$0
Value of information under uncertainty—how much would you pay for marketing research if this were your situation?
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.60 Success
.40 “Failure”
$4 million
$1 million
Introduce “A”
Do notintroduce
Case A2
$0
Value of perfect information: How much would you pay for certainty that the product will be successful?
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Success
Failure
$2.4 million(.6 x $4m)
$.4 million(.4 x $1m)
Introduce A
Do notintroduce
Case A2
$0
Value of perfect information: Nothing, we would introduce the product regardless of marketing research. On average, the firm would make $2.8 million in gross margins.
+
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.60 Success
.40 Failure
$4 million
-$2.5 million
Introduce B
Do notintroduce
Case B
$0
Value of perfect information: How much would you pay for certainty that the product will be successful?
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Success
Failure
.6*4=2.4m
.4*(-2.5)= (-$1m)
Introduce B
Do notintroduce
Case B
$0
One year’s perspective: Company would still choose to introduce because on average, on average net would be +1.4m, but information could prevent an average loss of $1m.
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Expected value of perfect information:
• The value of information under certainty, (discovered through research), prevents a $2.5 million loss 40% of the time ($1m),
• minus the value of information under uncertainty, worth $0, 60% of the time.
• Expected value of “perfect” information is $1m, or an upper limit for expenditures on research.
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Success
Failure
.9*4=3.6m
.1*(-2.5)= (-$.25m)
Introduce B
Do notintroduce
Case B
$0
Across years: Research reduced probability of failure from .4 to .1, providing an average return of $3.35m, a gain of 1.95m over $1.40m.
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• As probabilities and costs of failures increase, the expected value of information increases.
• Costs come from accounting records.
• Probabilities come from past experience.
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.20 Success
.80 Failure
$0.8 million(.2*4.0 =$.8 m)
-$2 million(.8*-2.5 = -$2m)
Introduce C
Do notintroduce
Case C
$0
The product would not be introduced (net -$1.2.m) without research, prevents a $2.5m loss 80% of the time, or $2m on average.
More realistic scenario
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More simply put…
• The dollar value of any given research project depends on the amount of money riding on the decision
• If a decision has already been made and research will not affect it, research has zero value (“window-dressing”).
• The value of research depends on its ability to provide clear direction—formulating the research problem correctly.
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“The Company's expenditures for research and development were approximately $121.9 million in 1998, $106.1 million in 1997, and $84.3 million in 1996.” (From Kellogg’s 10-K. Sales and operating profits were $6,762.1 and $895.6 million, respectively.)
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Kellogg’s
• Research and development expense (millions): $110.2, $118.4, $104.1 (2001, 2000, 1999, respectively)
• Sales $8,853.3 $6,954.7 $6,984• % 1.5% 1.7% 1.5%• Operating
profit $1,167.9 $989.8 $828.8 • % 9.4% 11.9% 12.5%