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

Ted Mitchell

A Basic Car

The Car’s Conversion

Processmiles per

gallon

gasoline

Strange looking

Car

Miles Travelled

gasolinegasoline

gasoline

Miles Travelled

Miles Travelled

Simple Models of A Car’s Performance as a Transportation Machine

Input to the Car, I Gasoline: 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, I Gasoline: 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 MachineCups sold per server

It looks like A Two-

Factor marketing machine

Number of servers hired

Number of servers hired Number of

servers hired

Number of servers hired

Profit from Cups of Coffee sold

Profit from Cups of Coffee soldProfit 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 Serversr = 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 Serversr = Z/S

Profits Returned per Hour, Return on Hoursr = Z/H

Output from the Machine, O = r x I

Dollars of Marketing Profits, Z

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 performancesP1: 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 performancesP1: Benchmark Performance

P2: Your Biz Performance

∆P = P2-P1

Input: Number of Store Hours Open: H

100 hours 110 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 performancesP1: Your initial performance

P2: Your second Performance

∆P = P2-P1

Input: Number of Store Hours Open: H

100 hours 110 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 DifferencesP1: Benchmark Performance

P2: Your Biz Performance

∆P = P2-P1

Input: Number of Store Hours Open: H

100 hours 110 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 hours Proposed 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 hourr = $40 per hour

Output: Profit, Z = r x H

$4,000 Forecasted 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 Proposed Amount of Input, I = 110 hours

Conversion rate: Profit per Hour, r = Z/H

Profit per hour$40 per hour

Profit per hourr = $40 per hour

Output: Profit, Z = r x H

$4,000 Forecasted 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!