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131_Mela.ppt - Introduction to Marketing

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					Marketing: Then and Now


       Carl F. Mela
      Duke University




                        Then and Now – 1
                       Issues and Data
• Then (my AMA)
    – One short-term market of interdependent consumers facing
      aggregated communications
• Now (your AMA)
    – Multiple markets of linked and interacting consumers and
      firms over long horizons facing customized communications
          • Longer-term
          • Interactivity / Network Effects
               – Customer-Customer / Network effects
               – Customer-Firm
          • Spatial Demand
          • CRM/Lifetime Value

Overview Current Issues Summary                        Then and Now – 2
                      Estimation Then
      •   EM/Mixture models
      •   Simulated maximum likelihood
      •   Dynamic programming and control
      •   Stochastic models
      •   Meta-analyses




Overview Future Issues Summary              Then and Now – 3
                      Estimation Now
• EM/Mixture models              • MCMC/Bayesian
• Simulated maximum              • Time series (VAR,
  likelihood                       DLM, etc.)
• Dynamic programming            • Spectral methods
  and control                    • Learning models
• Stochastic models              • Spatial statistics
• Meta-analyses                  • Empirical I/O models
                                 • Non-parametrics
                                 • Method of moments

Overview Future Issues Summary                    Then and Now – 4
1. Long-term Erosion of Brands
                        Erosion of Brands
  • Customers are more price sensitive.
        – 75% of CPG retailers and manufacturers rank
          pressure to reduce price as single largest threat in
          the next 3 years - IRI/EIU Survey
        – Sales elasticities have increased 1 point in past 25
          years (Bijmolt et al. 2005)




Overview Current Issues - Brand Erosion Summary          Then and Now – 6
                                       Erosion of Brands
                                       Changing Promotional Landscape

                                 70%                              61%
                                 60%
             Percent of Budget




                                 50%      40%
                                                            33%
                                 40%                                       27%
                                                24%
                                 30%
                                                                                 15%
                                 20%
                                 10%
                                  0%
                                       Advertising       Trade          Consumer
                                                       Promotion        Promotion

                                                     1978    2001          Hoyt/Carol Wright/Accenture/
                                                                           Cannondale/Donnelly
Overview Current Issues - Brand Erosion Summary                                           Then and Now – 7
                                          DLM
                    Sales                    Discounting         Advertising




                      Intercepts                  Elasticity




                                                           Ataman, van Heerde, and Mela 2006
Overview Current Issues - Brand Erosion Summary                              Then and Now – 8
2. Customer – Customer Interactivity
                           Network Effects
   • Often related in economics and sociology to
     adoption, pricing, etc.
   • In marketing many new contexts to study
     centrality and social influence across
     individuals as well as populations
         – Peer-peer networks
         – Internet chat
         – Internet auctions

Overview Current Issues – Network Effects Summary   Then and Now – 10
                                    New Data




Overview Current Issues – Network Effects Summary   Then and Now – 11
                                  New Tools

• Structural orientation with multiple agents
     – Auctions
           • Goal is to infer latent costs of seller and bidder (e.g.,
             opportunity costs of bidding and acquisition costs) and
             bidder value distribution
                – Bidders bid if expected return is positive
                – Sellers list number of items to max profits
                – Imply bidder and lister likelihoods for MCMC
           • Can infer effect of fee change when none exists


Overview Current Issues – Network Effects Summary                Then and Now – 12
   Number of Sellers   Modeling Network Effects




                                      Number of
                                      Bidders       Yao and Mela (2006)
Overview Current Issues – Network Effects Summary         Then and Now – 13
             Modeling Network Effects




                                                    Yao and Mela (2006)
Overview Current Issues – Network Effects Summary         Then and Now – 14
3. Customer Firm Interactivity
                                          Media Proliferation
                                                 Ad Targeting
                               IPTV               100% HH
                         0.5% HH Penetration     Penetration                DVR
                                                                       10% HH Penetration
  Interactive/Place Based
   Out of Home – 400M
         Billboards                                                              DVD Player
                                                                              68% HH Penetration
  Satellite Radio &
   Internet Radio                                                                  Video On
10% HH Penetration                                                              Demand 22% HH
70% HH Penetration                                                                Penetration

    Portable Audio                                                               Virtual Channels
  40%HH Penetration                                                            22%HH Penetration
                                                                                  Interactive
                                                                                Program Guide
              70% cell phone                                                  19% HH Penetration
             HH. Penetration
                                                                              Internet
                            Gaming                                       70% HH Penetration
                       70% HH Penetration                                Broadband 36% HH
                                                      Dual Sync
                                                 55 % HH Penetration         Penetration
  Source: IRI, Kagan, Dima, WSJ, Various, 2005
    Overview Current Issues – Media Proliferation Summary
                                 Interactivity

  • Interactive, Addressable and Customizable
    Media
        – Internet
             • MSN Ad -- $1MM for 24 hours ($25 K 4 Years Back)
        – Interactive TV
             • 10MM US HH
        – Media are now merging
             • So may the research streams




Overview Current Issues – E-customization Summary            Then and Now – 17
            E-Customization Approach

                                        Individual level preference
         Media                                 coefficients
      Configuration

                                Statistical                               New
                                                    Optimization
                                  Model                               Configuration

           Click
           Data




                                                                       Ansari and Mela 2004

Overview Current Issues – E-customization Summary                           Then and Now – 18
                 Modeling Heterogeneity
         • Finite Mixtures                         • Continuous
                                                     Mixtures


                                                   0.15
                                                     0.1
                                                                                   2
                                                    0.05
                                                        0
                                                                              0
                                                            -2

                                                                 0
                                                                         -2
                                                                     2



  Dirichlet Process Priors model uncertainty about functional
  form of the population distribution G
      (MacEachern (1994), Escobar and West (1999), Antoniak
      (1974), Blackwell and MacQueen (1973))          Ansari and Mela 2004

Overview Future Issues – E-customization Summary                                  Then and Now – 19
                     Optimization Results
                                                              0.568
     0.6
                                                    0.445
     0.5              Prob(Click)      No. Clicks


     0.4                             0.296
                         0.237
     0.3

     0.2

     0.1

       0
                        Original                    Optimal     Ansari and Mela 2004

Overview Current Issues – E-customization Summary                     Then and Now – 20
4. Spatial Effects
New Issues/Methods Spatial Demand
• Demand and equilibrium prices used to inform
  apartment location decision




                          Interpolated Rents, Roanoke VA
                                                           Duan and Mela (2006)
Overview Current Issues – Spatial Effects Summary               Then and Now – 22
                                    Estimation
  •      Set Up Moment Conditions
       –      Demand side (location demand errors
              independent of instruments)
       –      Supply side (price markup errors independent of
              instruments)
  •      MCMC Estimation (Romeo 2006)
       –      Replace typical MOM e’Z = 0 with e’Z ~ N(0,S)
             •     Allows for Bayesian inference
       –      Spatial correlation in demand and supply errors

Overview Current Issues – Spatial Effects Summary       Then and Now – 23
                            Policy Simulation




• No spatial covariation understates profit variation and leads
  to parameter bias.
• Spatial model yields 65% increase in profits (to $35,010).

 Overview Current Issues – Spatial Effects Summary   Then and Now – 24
5. Customer Relationship
   Management (CRM)
                           CRM Lifecycle

      • Acquisition/Birth
           – Lifetime Value > Cost of Acquisition
      • Growth
           – Cross selling and upselling
      • Retention/Death/Churn
           – Predict churn
           – Loyalty programs


Overview Current Issues – CRM Summary               Then and Now – 26
                 CRM Information Sets

  • Many observations and variables
       – Multiple data sources to merge
       – Many customers and variables, but incomplete sets
       – Scalability (e.g., SML v. MCMC)
  • Rare events
       – Churn, cross-selling, acquisitions
  • Inward focused data

Overview Current Issues – CRM Summary              Then and Now – 27
                             Internal Data
                                                External Balances
       A random             Internal Balances
                                                Collected through
       sample                Demographics
                                                     Surveys




       Remainder of                              Total Balances
       the Customer         Internal Balances         And
       Base                  Demographics       Share of Balances
                                                 To Be Inferred



                                                     Du Kamakura and Mela (2006)
Overview Current Issues – CRM Summary                           Then and Now – 28
         Holdout Sample Performance
                           Ownership                      Total                      Share
                    True    Pred.      Hit      True       Pred.      Corr    True   Pred.   Corr
  Non-I Checking     60%      56%      83.4%     $5,810      $5,046    .711   61%      63%     .887

  I-Checking         52%      51%      81.8%     $9,491      $8,106   .710    53%      54%     .899

  Savings            79%      80%      83.9%    $19,071     $14,615   .697    43%      46%     .848

  CDs                20%      19%      89.0%    $48,676     $31,709   .600    39%      40%     .915

  Car loan           47%      45%      66.5%    $14,065     $14,163   .449    15%      16%     .937

  Personal loan      25%      23%      80.1%    $18,637     $18,568   .420    17%      18%     .958

  Line of credit     18%      18%      90.8%    $10,578     $10,525   .375    45%      46%     .951

  Credit card        66%      66%      70.6%     $4,682      $4,249   .459    24%      26%     .807

  Mortgage           52%      52%      72.6%   $100,882    $126,730   .509    26%      25%     .984

  Investments        55%      56%      69.5%   $107,533    $109,266   .386     7%       7%     .862

Overview Future Issues – CRM Summary                                                 Then and Now – 29
         Rare Events, Many Variables




Overview Current Issues – CRM Summary   Then and Now – 30
                                    Summary
  • New Issues
        – Brands in decline, proliferation of media, interactivity,
          spatial demand, CRM
  • New Data
        – Log files, call records, CRM systems
        – Massive files
  • New Approaches
        – Non-parametrics, spatial statistics, EIO
  • Most Interesting Time in Marketing Since “Then”

Overview Current Issues   Summary                               Then and Now – 31

				
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