Quick Theory of Marketing Management

Ted MitchellApril 4, 2015

The Theory of Marketing Management

• Is the explanation of how sellers maximize profits by finding the optimal level of customer value to build into their offerings to their customers

Revenues and Costs are functions of the customer value

• Increasing Customer Value equals More Revenue and Expense• Marketing Profit = Revenue from adding value – Cost of adding the value

0, 0 Amount of Customer Value in Offering, U

o$ Revenue from selling customer value

0, 0 Amount of Customer Value in Offering, U

o$ Cost of Providing Value

Revenue, R = mUeCost, C = nUc

0, 0 Amount of Customer Value

o

Dollars, $

0, 0

o

Costs

Revenue

Profit

0, 0 Amount of Customer Value, U

Profit, Z

Z = aU –bU2

There is an Optimal Level of Customer Value, U* to be invested into the seller’s

offering

• which maximizes Marketing Profit, Z• The optimal amount of profit, Z, is where marginal revenue is equal to

marginal cost or where the first derivative of profit wrt value is equal to zero

• There is level of customer value, U, at which the amount of profit is decreasing as the level of investment in customer value increases

U*U*

0, 0 Amount of Customer Value, U

ROCV = Z/U

ROCV = a –bU

0, 0 Amount of Customer Value, U

Profit, ZAverage rate, Z/U = a –bU

Average Rate Of profit, Z, being returned on Customer Value, U, ROCV

• The rate of return, ROCV, is a function of the amount of customer value, U, in the seller’s offering

• Marketing Profit, Z = ROCV x (customer value, U)• Marketing profit, Z = (a-bU) x U• Marketing profit, Z = (aU-bU2)

The average speed at which profit is being returned

• From the seller’s investment in customer value is always slowing down as the size of the investment in value is increasing

• The marginal speed at which the profit is being returned is positive when the size of the investment is first increased and eventually becomes negative as the amount of investment continues to increase

0, 0 Amount of Customer Value, U

Profit, Z = (a – bU) x U

Elasticity of Investment =

%∆ROCV/%∆U

-0.5 -0.75 -0.95 -1.0 -1.05 -1.25 - 1.5 -2.0

U*Amount ofCustomer Value, U

Average Rate of (Profit) Return

Curve

0, 0

ROCV = a – bU

-0.5 -0.75 -0.95 -1.0 -1.05 -1.25 - 1.5 -2.0

U*

Elasticity of Investment =

%∆ROCV / %∆U

There is an elasticity of Customer Value, e

• elasticity of customer value, e= %∆ROCV/%∆U• Elasticity acts as a guide as to the choice of increasing or

decreasing the amount of customer value in the offering

The Theory of Marketing Management

• As an explanation of how to maximize profits by designing offerings with the optimal amount of customer value in the offering

• is fairly straight forward

The great difficulty in

• The Practice of Marketing Management is to measure the amounts of customer value

• which ingredients of the marketing mix (e.g., product, promotion, place) are making positive contributions to customer value, U.

• The simple, albeit heroic, solution is to assume that the amount value can be measured by measuring the amount of money the seller invests into creating customer value!

In practice Marketing managers

• Replace every U in the theoretical equations• With an I representing the amount of money

the seller spends on creating customer value, U

• Treat every marketing expenditure, I, on creating customer value as if it was a marketing investment in customer value

Learning the Theory

• Takes Hours• Learning the Practice takes a life time