Table of Contents
Foreword viii Dinyar S. Devitre
Foreword x John A. Greco Jr.
Part I Financial Tools Necessary for Understanding the
Marketing-Finance Interface 1 Choosing Marketing Policy in the Short Run 5 1.1 Should the Firm Use Profits to Choose Marketing Policies? 6
1.2 Should the Firm Use the Return on Investment (ROI) Criterion for
Marketing Decision Making? 7
1.3 How Does the Ownership Structure of the Firm Affect How Marketing
Policies Should Be Chosen? 10
1.4 What Does the Risk-Adjusted ROI Criterion Imply for Multiproduct and
Multidivisional Firms? 17
2 Choosing Marketing Policy in the Long Run 19
2.1 How Should the Firm Choose Long-Run Marketing Policies under
Certainty? 20
2.2 How Should the Firm Choose Long-Run Marketing Policies under
Uncertainty? 23
2.3 How Should the Firm Measure the Long-Run Effects of Different Marketing Policies? 25
2.4 How Should the Multiproduct Firm Choose Long-Run Marketing Policies
under Uncertainty? 27
2.5 How Should the Firm Make Long-Run Strategic Marketing Decisions
under Uncertainty When It Has Strategic Flexibility? 28
2.6 How Should the Firm Measure and Reward Managers When It Has
Strategic Flexibility in Choosing Marketing Policies? 33
Part II Defining the Market
3 What is the Impact on Strategy? 39
3.1 What Market Does the Firm Compete In? 40
3.2 How Does the Definition of the Market Affect the Firm’s Marketing
Strategy? 43
3.3 How Does the Firm’s Defi nition of the Market Affect Managerial
Incentive Schemes? 44
Part III Understanding Market Shares
4 Should the Firm Pursue Market Share? 47
4.1 Why Do Firms Pursue Market Share? 48
4.2 Does an Increase in Market Share Lead to Higher Short-Run Profits? 49
4.3 When Does an Increase in Market Share Lead to Higher Long-Run
Profits? 53
4.4 Should the Firm Enter High-Growth Markets? 55
4.5 Should the Firm Pursue Market Share in a High-Growth Market? 56
4.6 Should the Firm Attempt to Increase Its Volume-Based Market Share
in the Short Run When Cost Dynamics Are Present? 57
4.7 Should the Firm Pursue Volume-Based Market Share When Demand
Dynamics Are Present? 61
4.8 Should the Firm Pursue Market Share If Neither Cost Nor Demand
Dynamics Are Present? 63
4.9 Should the Firm Pursue Market Share by Being the Pioneer in Its
Industry? 66
4.10 Is It Ever Optimal for the Firm to Keep Its Volume-Based Market
Share Low? 68
5 Should the Multiproduct Firm Use the Market Share Metric? 78
5.1 Market Share and Pricing for the Durable Goods Manufacturer That Sells
Spare Parts 79
5.2 Market Share and Pricing for the Firm That Sells After-Sales Contracts 80
5.3 How Does Uncertainty Affect Pricing Policy and Market Share for the
Firm That Sells Proprietary Spare Parts or After-Sales Contracts? 81
5.4 Should the Firm That Introduces Product Upgrades over Time Pursue
Market Share or Current Profits? 82
5.5 How Should the Firm Change Its Market Share and Long-Run Pricing
Policy When Competitors Introduce New Products? 84
5.6 Should the Firm Focus on Market Share If It Sells Products That Must Be Used Together? 85
5.7 Should the Multiproduct Firm Allocate Resources across Products on the
Basis of Their Respective Market Shares? 86
Part IV Strategies and Pricing Policies for New Products and Bundles
6 Pricing New Products: Strategies and Caveats 93
6.1 Can the Firm Price a New Product to Maximize Its Profitability? 94
6.2 How Should the Firm Price a New Product under Uncertainty? 96
6.3 How Does the Firm’s Ownership Structure Affect New Product
Pricing? 99
6.4 Are Fixed Costs Relevant for Pricing New Products When the Firm Is
Privately Owned? 101
6.5 Are Fixed Costs Relevant for Pricing New Products When the Firm Is
Publicly Owned? 106
6.6 Should Firms Preannounce Their New Products? 108
7 Choosing Strategies for New Products Using Market-Level
Data 112
7.1 Which Product Qualities Should the Firm Produce? 113
7.2 Choosing New Product Strategy: The Case Where Consumers Are Fully
Informed 115
7.3 Choosing New Product Strategy: The Case Where Consumers Are Not
Fully Informed 119
7.4 Choosing New Product Strategy: The Case Where Some Consumers Are
Well Informed But Others Are Not 120
8 Choosing Strategies for New Products Using Primary Data 124
8.1 Controlled Purchase Experiments 125
8.2 Intentions Studies 127
8.3 Preference and Choice Studies 131
8.4 Estimating Demand Using Reservation Prices 134
8.5 Estimating the Demand for New Products Using Self-Stated Reservation
Prices 139
8.6 Estimating the Demand for New Products by Inferring Reservation
Prices 141
8.7 Measuring Reservation Prices Using Auctions 146
8.8 When Should Firms Use Auctions? 148
8.9 Perceptions and New Product Demand 148
8.10 How Useful Are Experiments for Measuring New Product
Demand? 149
8.11 Simulated Test Markets 150
8.12 Test Markets 152
9 Bundling 157
9.1 What Is a Bundling Strategy? 158
9.2 When Should Firms Use a Bundling Strategy? 159 9.3 Bundling and Cross-Couponing Strategies 164
9.4 Applications of Bundling Theory 170
9.5 Why Do So Many Bundling Strategies Fail? 177
9.6 How Can the Firm Improve the Chances That a Bundling Strategy Will
Succeed? 178
Part V Integrating Marketing Strategy and the Supply Chain
10 Channels of Distribution 183
10.1 Choosing a Channel Strategy 184
10.2 Choosing a Channel Strategy Using an Exclusive Distributor: The Case
Where the Manufacturer Has Economic Power 185
10.3 Choosing a Channel Strategy Using an Exclusive Distributor: The Case
Where the Distributor Has Economic Power 191
10.4 Coordinating Price and Advertising Decisions in the Channel 193
10.5 Channel Strategy in the Multiproduct Case 195
10.6 Choosing Channel Strategy Using Multiple Exclusive Distributors 198
10.7 Choosing Channel Strategy Using Nonexclusive Distributors 200
10.8 Should the Firm Use a Vertical Integration Strategy? 201
10.9 Long-Term Channel and Supply Chain Strategy 203
Part VI Marketing Policy and Consumer Behavior
11. How Does Consumer Behavior Affect Marketing Policy? 207
11.1 What Is the Standard Economic Model of Consumer Choice? 208
11.2 Is the Standard Economic Model of Consumer Choice Good Enough for
Marketing Managers? 211
11.3 Do Marketing Managers Use These Theories of Consumer Behavior in
Practice? 216
11.4 Some Applications of Prospect Theory 217
11.5 Multiperiod Applications of Prospect Theory 222
11.6 How Should the Firm Change Its Prices over the Business Cycle? 226
11.7 Implications of Prospect Theory for the Human Resources
Manager 227
11.8 Implications of Prospect Theory for Financial Markets 229
11.9 What Metrics Should the Firm Use to Evaluate Consumer
Behavior? 231
Part VII How to Choose Advertising and Promotion Strategies
12. Coordinating Advertising Strategy, Branding, and
Positioning 237
12.1 What Is Product Positioning? 238
12.2 Choosing Advertising Message Strategy 239
12.3 Measuring the Effectiveness of an Advertising Message 247
12.4 Managerial Implications for Branding and Positioning Existing
Products 252
12.5 Managerial Implications for Positioning New Products and Rebranding Existing Products 258
12.6 How Should the Firm Coordinate Its Advertising Message Strategy with
Other Marketing Decision Variables? 263
13. Determining the Advertising Budget 265
13.1 Advertising and Marketing Strategy 266
13.2 How Should the Firm Coordinate Its Price and Advertising Decisions?
Some Basic Concepts 269
13.3 How Should the Firm Coordinate Its Price and Advertising Policy to
Maximize Short-Run Performance under Certainty? 274
13.4 Implications for Choosing Advertising Policy over the Product Life
Cycle 275
13.5 How Should the Firm Vary Its Price and Advertising Policies over the
Business Cycle? 279
13.6 How Should the Firm Coordinate Its Price and Advertising Policy in the
Short Run When Demand Is Uncertain? 280
13.7 How Should the Firm Coordinate Its Price and Advertising in the Long
Run When Demand Is Certain? 282
13.8 Coordinating Price and Advertising in the Long Run When Demand Is
Uncertain 284
13.9 Corporate Image Advertising 284
14 Measuring Advertising Productivity 287
14.1 How Can the Firm Measure Advertising Productivity? 288
14.2 How Can the Firm Measure Advertising Productivity Using Historical
Data? 289
14.3 How Can the Firm Measure the Productivities of Different Advertising
Media? 297
14.4 Measuring Media Productivity Using Reach Models 298
14.5 Measuring Media Productivity Using Gross Rating Point Models 302
14.6 How Much Should the Firm Be Willing to Pay for Advertising in a Given
Medium Based on Standard Commercial Rating Scores? 304
14.7 How Should the Firm Determine When to Purchase Advertising Space
and How Much to Spend on It? 307
14.8 Measuring Media Productivity Using Sales Models 315
14.9 Dynamic Carryover Effects 316
Part VIII How to Choose Compensation Plans
15 How Should the Firm Compensate Managers to Maximize
Performance? 321
15.1 The Single-Product Firm: Short-Run Horizon 322
15.2 The Single-Product Firm: Long-Run Horizon 323
15.3 The Multiproduct Firm: Short-Run Horizon 327
15.4 The Multiproduct Firm: Long-Run Horizon 328
15.5 How Do Wall Street’s Expectations Affect the Firm’s Compensation
Policy? 330
15.6 What Roles Should the Finance Department and Senior Management Play in Determining the Firm’s Compensation Plans? 330
16 How Should the Firm Compensate Its Sales Force? The Basic
Model 333
16.1 Reservation Income 334
16.2 How Should the Firm Compensate Its Sales Agent If the Sales Agent’s
Effort Is Observable? 335
16.3 Should the Firm Pay the Sales Agent Using a Draw System? 341
16.4 Should the Firm Pay the Sales Agent on the Basis of Sales Revenue or
Gross Profits? 342
16.5 How Does the Firm’s Cost Structure Affect the Sales Force
Compensation Policy? 342
16.6 What Compensation Plan Should the Firm Use When It Delegates
Decision-Making Authority to the Sales Agent? 346
16.7 How Will the Internet Affect the Firm’s Sales Force Compensation
Plan? 348
16.8 What Compensation Plan Should the Firm Use if It Hires the Sales Agent
Using a Multiperiod Contract? 350
17 Model Extensions: How Should the Multiagent/Multiproduct
Firm Reward and Measure Sales Force Performance? 356
17.1 How Should the Single-Product Firm with Multiple Salespeople
Compensate Its Sales Force? 357
17.2 How Does the Firm’s Market Segmentation Strategy Affect the Firm’s
Compensation Plan? 359
17.3 How Should the Multiproduct Firm Compensate Its Sales Force? 361
17.4 How Should the Multiproduct Firm Measure Sales Force
Productivity? 366
Part IX How to Allow for Competitive Reaction
18 How to Make Marketing Decisions When Competitors React: A
Game-theoretic Approach 375
18.1 What Is the Firm’s Objective When Competitors React? 376
18.2 Choosing Optimal Strategies When Competitors React: Basic
Methodology 378
18.3 Choosing Optimal Strategies When Competitors React: Some
Refi nements 383
18.4 Some Additional Examples of Optimal Decision Making When
Competitors React 388
18.5 What Does Competitive Reaction Imply about Data Collection and Data
Analysis? 396
18.6 How Useful Is the Game-Theoretic Methodology for Marketing Decision
Making When Competitors React? 399
18.7 How Can the Firm Make Sequential Decisions after Allowing for
Competitive Reaction? 399
Appendix 405
Part X Other Applications of Fusion for Profit
19 Measuring and Building Brand Equity 413
19.1 When Does Brand Equity Exist? 414
19.2 How Does the Name of a Product Affect Brand Equity? 415
19.3 Brand Name and Pricing Strategy 418
19.4 Strategies for Building Brand Equity 422
19.5 How Can the Firm Measure Brand Equity? 424
19.6 Should the Firm Use a Brand’s Market Share to Measure Brand
Equity? 424
19.7 Measuring Brand Equity Using Financial Data: The Net Present Value
Method 425
19.8 Measuring Brand Equity Using Financial Data: Tobin’s q-Ratio Method 429
19.9 Measuring Brand Equity in a Competitive Market Using Behavioral
Data 430
20 How Marketing Policy Aff ects Consumer Well-Being and Social
Welfare 436
20.1 What Is Social Welfare and How Is It Measured? 437
20.2 Is Profit Maximization Compatible with Maximizing Social
Welfare? 439
20.3 Do Consumers and Society Gain When Firms Give out Free
Samples? 442
20.4 Do Consumers and Society Gain When the Firm Has a Learning
Curve? 443
20.5 Do Consumers and Society Gain When There Are Demand
Dynamics? 445
20.6 Are Quantity Discounts Good for Consumers and for Society? 446
20.7 Does Advertising Make Consumers and Society Better Off? 448
20.8 How Does Advertising Affect Consumer Well-Being and Social Welfare
over the Product Life Cycle? 458
20.9 Is Competitive Advertising Good or Bad for Consumers and for
Society? 460
20.10 How Does Product Bundling Affect Consumer Well-Being and Social
Welfare? 464
20.11 Do Consumers and Society Gain When the Firm Introduces New
Models of Its Product over Time? 469
21 Internet Marketing 474
21.1 How Does the Internet Affect Prices? 475
21.2 Will the Internet Lead to Commoditization? 478
21.3 The Internet and Advertising Message Strategy 484
21.4 Measuring the Productivity of Internet Advertising 484
21.5 How Much Should the Firm Be Willing to Spend on Internet
Advertising? 487
21.6 How Should Search Engines Price Internet Advertising? 491
21.7 How Should the Firm Coordinate Its Internet Advertising and Sales Force Strategies? 495
21.8 How Does the Internet Affect Social Welfare? 498
21.9 How Will the Internet Affect the Advertising Industry in the
Future? 500
22 Mergers and Acquisitions 505
22.1 The Rationale for Mergers and Acquisitions 506
22.2 The Potential Gains from Mergers 507
22.3 Do Intangible Assets Add Value in a Merger? 509
22.4 Do Mergers Work? 512
22.5 Alternative Acquisition Strategies 514
22.6 Brand Equity and Mergers 516
22.7 The Roles of Private Equity Firms and Hedge Funds 524
22.8 International Mergers 527
23 How to Choose Optimal International Marketing
Strategies 531
23.1 Is It Necessary to Develop a Separate Theory of International
Marketing? 533
23.2 What Are the Major Pitfalls in International Marketing? 533
23.3 Under What Conditions Will International Marketing Strategies
Succeed? 536
23.4 How Should the Multinational Firm Allocate Resources across
Countries? 537
23.5 Should the Multinational Firm Change Its Product Design across
Countries? 541
23.6 What Is the Role of Country Managers and How Should the Parent
Company Measure and Reward Them? 543
23.7 What Organizational Structure Should the Multinational Firm Use? 550
23.8 How Should the Firm Choose and Implement the Optimal Outsourcing
Strategy? 553
23.9 What Strategies Should the Firm Use to Retain Personnel It Employs at
an Outsourcing Center? 558
Notes 563
Glossary 582
Index 619