Introduction to Marketing Analytics

“Marketing is to create value through customer acquisition and retention”

Marketing analytics is defined as the methods for measuring, analyzing, predicting, and managing
marketing performance with the purpose of maximizing effectiveness and return on investment.

Types of marketing metrics and data

Consumer Level Brand Level Market Level
• Customer loyalty • Brand Equity • Sales
• Customer lifetime value • Brand Share • Marketing Spending
• Number of friends • Competition
Types of data and data collection
Primary Data Secondary Data Structured Data Unstructured Data
• Research • Syndicated Data • Syndicated Data • Web/Mobile Data
• Survey • Web/Mobile Data • Firm Financial Data • Visual Data
• Experiments • Firm Financial Data
Process of Marketing Analytics
• Problem Definition: setting the scope
• Design: expected outcomes
• Data Collection & Analysis: drawing conclusions
• Reporting & Implications: recommendations

Identifying Markets and Building Marketing Strategy

Identify market is about understanding market characteristics and competitors
• Market Size
The market size can be determined by Sales
• Market Growth
The market growth can be determined by (Salest - Salest−1)/Salest−1
• Market Turbulence
The market turbulence is related to uncertainty and risk.
One way to define it is by Standardization: SD of 3 or 5 years Sales/Mean of 3 or 5 year Sales
• Competition
Number of competitors (not accurate)
Herfuendahl-Hirschman Index (HHI): market concentration
HHI = (s1)2 + (s2 )2 + . . . + (sn )2
sn is the market share percentage of firm n
Market share = firm sales/market sales
HHI < 1,500 Competitive Market
1,500< HHI < 2,500 Moderately Concentrated Market
HHI >2,500 Highly Concentrated Market

Fundamental of Marketing Strategy:

Segmentation: create segments of the market
Targeting: select one or more segments
Positioning: develop strategy and tactics for selected target segment (differentiation)

Criteria for Effective Segmentation

- Identifiable: customers can be identify
- Substantial: no small groups
- Accessible: customers must be reachable
- Stable: stable over time
- Responsive:
- Actionable

Segmentation Method: how can we cluster?

- A-priori (“naive”): Segments determined by researchers (young/old, male/female)
- Post-hoc: Based on analyses, Cluster analysis
Understanding Consumers
Loyal customers repeatedly purchase a determined product or continuously use it. Customers are loyal if
they buy products from the same company rather than other suppliers. Loyal customers are engaged with
advocate behaviors such as generating positive word of mouth both online and offline.
• Loyal customers are less costly to serve
• They are willing to pay more than others
• They are more likely to accept product extensions
• They can create barriers to entry for potential competitors
• Firms can defend from competitors’ attack

Consumer Decision Making

Need Information Evaluate Purchase Postpurchase
Cognition Search Alternatives Decision Behavior

Typically, the consumer decision making process start long before the actual purchase and continues long
after that. This process changes and depends on the consumer, the product, and the purchase context.
The consumer involvement is the degree of information processing and the amount of importance a
consumer attaches to a product while purchasing it.
Consumers are highly involved in the decision making process when the product is expensive, risky,
purchased infrequently, and highly self-expressive.
Consumer involvement is low when a product is relatively inexpensive and frequently purchased.

Developing and Evaluating Marketing Strategy

The marketing process is the combination of STP (segmentation, targeting, positioning) and 4P of Marketing
Mix (price, product, place, promotion).
The most distinctive skill of marketers is to build and manage brands.
A brand is a name, term, sign, symbol, or design or combination of these that identifies the make or seller of
a product or service.
The brand can create value for firms and consumers:
Firms Consumer
• Differentiate the product from competitors • Information about product quality
• Premium price • Reducing time and effort for decision making
• Reducing marketing costs • Helping consumers express themselves
• Competitive advantage and entry barriers
Brand equity is crucial but difficult to measure. Brands are commonly assessed by customer mind-set
measures such as awareness and attitudes. These metrics do not translate into monetary value.

1.Differentiation: the ability of the brand to stand apart from its

competitors and is central component in brand equity. It is
measured by whether consumers perceived the brand as
unique and distinctive.
2.Relevance: personal appropriateness of the brand to
consumer. It is measured by the extent to which the brand is
relevant to consumers.
3.Esteem: the level of respect, deference, and regard a
consumer holds for a given brand. It is measured by four
components (high quality, leader, reliability, regard).
4.Knowledge: reflect brand awareness and the extend to
which consumers recall and recognize the brand.
5. Energy: perception of innovation and dynamism. Reflect the brand’s ability to adapt and respond in a
timely way to changing consumer taste and needs.

Interbrand publishes the Best Global Brands report on an annual basis. Interbrand’s valuation model
examines three key aspects that contribute to a brand’s values:
1. The financial performance of the branded products or service
2. The role the brand plays in influencing consumer choice
3. The strength the brand has to command a premium price, or secure earnings for the company.
1. Financial analysis: Economic profits, i.e., the after-tax operating profit of the brand minus the cost used
to generate the brand revenue and margins.
2. Role of the brands: The portion of the purchase decision attributable to the brand, as opposed to other
factors. This is so-called Role of Brand Index.
3. Brand Strength: The ability of the brand to create loyalty and, therefore, sustainable demand and profit
into future.

The objective of this brand equity metric is to peel away all financial components of brand value to
determine how much brand alone contributes to brand value.
Brand Z uses the three pillars for measuring brand equity:
1. Meaningful: in any category, these brands appeal more, generate greater “love”, and meet the
individual’s expectations and needs.
2. Different: unique in a positive way and “set the trends”, staying ahead of the curve for the benefit of the
consumer.
3. Salient: they come spontaneously to mind as the brand of choice for key needs.

There are two different theoretical view on the role of advertising:

1. Advertising as information
Advertising merely informs consumers about product availability and increases awareness. Consumers
can’t buy a product if the don’t know it is available. This view suggests advertising increases the current
sales.
2. Advertising as persuasion
Advertising not only informs consumers about product availability but also creates brand loyalty. Advertising
persuaded consumers that the product is superior. This view suggests advertising increases not only the
current sales but also future sales.

To measure advertising we can use:

I) Advertising to Sales Ratio = Advertising spending / Sales
Most popular measure. Mirrors how companies allocate budgets on advertising in practice.
II) Share of Voice = Advertising spending / Market advertising spending
This measure captures a company’s advertising relative to that of its competitors.
III) Log of Advertising Spending
Allow to measure advertising elasticity. Percentage of sales increase if 1% advertising spending increases.

Vector Autoregressive Model (VAR) is a way of estimating long-term marketing effects because marketing
campaigns affects future sales and depends on past sales.

Measuring Media Advertising

1. Impression
The number of times a specific advertisement is avail to be seen or otherwise exposed to media audience.
impression = reach × average frequency
reach = number of unique individuals exposed to certain ads
frequency = average number of times each such individual is exposed

2. Gross Rating Points (GRP)

The sum of all rating points delivered by the media vehicles carrying an advertisement or campaign

∑
GRP = [rating point × frequency]
rating points (% of reach) = % of unique individuals exposed to certain ads in a defined population
average frequency = average number of times each such individual is exposed

3. Frequency Response Functions

Expected relationship between advertising outcomes (sales or revenues) and advertising frequency
(linear response, learning curve response, threshold response)

4. Wear-in
The frequency required before a given advertisement achieves a minimum level of effectiveness
5. Wear-out
The frequency at which a given advertisement begins to lose effectiveness or even yield negative effect
There are 18 different media vehicles. It is almost impossible for firms to measure advertising responses
accurately across all advertising vehicles and their combinations.
Classify firms media vehicles choices into smaller and manageable subsets of choice, using the following
criteria:
• Quantity of the reach: the count of the captive audience that the firm obtains through an advertising spot
• Quality of the reach: the degree to which the media channel’s reach is customized to fit the advertiser’s
specific target market in terms of future buying potential
• Product message: the way the advertiser aims to build in product differentiation by demonstrating a
favorable comparison of key product attributes over a competitor

Analyzing Customer Profitability

Companies try to satisfy customers by providing superior customer value and higher customer satisfaction,
but however, maximizing customer satisfaction comes at cost.
Customers are important assets, it is important to acquire and retain customers, but what is more important
is to manage customer profitability. The challenge is to balance the two side of customer value, the value to
customers and the value to companies.

•Star customers are the most desirable one, loyal and satisfied customers
who deliver long-term profits.
• Lost causes cost more than they worth. Frequently complain or return
products, spread negative word-of-mouth.
•Free riders takes more advantage than for what they pay for
•Vulnerable customers are valuable but vulnerable for switching the brand.
1. Customer Lifetime Value (CLV)
The net present value of all future streams of cash flows that a customer generates in the life of the
business relationship with the company. CLV is based on profits, not revenue, taking into account costs. Is
a measure of long-term profitability.
r
CLV = M × − AC
(1 + i − r)
M = profit or contribution margin (annual revenue - product and service costs)
r = retention rate i = constant discount rate AC = acquisition cost
CLV helps set the limit of acquisition cost, provides a template for customer segmentation, help companies
understand the driver of customer profitability, help marketing managers invest in customers.
Cross-selling: selling other products of the company to the existing customers (e.g. insurances)
Up-selling: selling the premium products to the customers who buy non-premium products
Customer Equity is the sum of all CLV across all existing and potential customers. CE is a good proxy for
firm value and suggests the long-term value of an organization.

2. Customer Referral Value (CRV)

A sum of the values of all customers acquired by the referred customer. We can distinguish two types of
customers: those who would not have been acquired without referrals and those who would have bought
the product anyway.

The customers in each cell should be evaluated differently and need different
marketing programs.
The optimal solution is to apply marketing programs and migrate all customers
to champions.

To evaluate whether the marketing campaign was successful, we need to compute the ROI.
CRV approach allows managers to calculate the value of free customers. There are customers who directly
refer and bring new customers (direct network effect), but there are another type of customers who bring
new customers without knowing them (indirect network effect).

3. RFM Analysis (Recency, Frequency, Monetary Value)

Recency: a measure for the time elapses since a customer last placed an order with the company
Frequency: a measure of how often a customer orders from the company in a certain time period
Monetary Value: a measure of the amount that a customer spends on an average transaction
To compute the RFM score the managers assigns a relative weight for each variable
RFM incorporate some aspects of customer buying behaviors and is backward looking measure.
Connected Consumers and Social Media
In a connected world, network externality becomes more important and the value of a product depends on
how many other users there are.
AIDA model: Attention, Interest, Desire, Action. Passive model
AISAS model: Attention, Interest, Search, Action, Share. More search for information online and sharing.
Consumers are getting active in media consumption. They actively find suitable media to create and share
their contents. Post-purchasing behavior becomes more important. A lot of different ways of using a
product and service can be shared online by consumers, not marketers.
The product in digital era is affected by real time information sharing for sensing fast-changing consumer
trend. This communication directly and immediately affects production process.
The pricing is set between customer perceived value (price ceiling) and product cost (price floor).
Distribution channel in the digital age are online, offline and mobile channels.
Communication are done with new media that are paid, owned (websites) and earned media (generated by
consumers).

Opinion leaders are well known individuals or organizations with the ability to influence public opinion.
Market maven are actively involved in gathering market and product information. They share experiences.
Social hub (a number of connections) and broker (linkage).

1. Search Advertising
Advertising through searching engines. Organic links are based on relevance or popularity and are not paid.
Paid links or sponsored are advertising bought from companies. The performance is measured by:
Impression = number of exposure to consumers
Click-through rate (CTR) = number of clicks per impression
Conversion rate = % of purchase/application/sign-up
To calculate the profit we can use:
Cost-per-click = total ad spending / # of clicks
Search ad profit = [(impression × CTR × conversion rate) × margin] - search ad cost

2. Display Advertising
Display ads can help attract customers and increase brand awareness. This kind of ads can be text, images
or video. To measure the impact we use:
Impression = cost per thousand impressions
Click through rate = number of clicks/impressions
Conversion rate = number of purchases/number of clicks
Based on recent searches display advertising affects offline sales for new products.
Awareness → Consideration → Intention → Purchase

When evaluating the impact of online advertising we have to consider the effective attribution to the ads,
eventual lag effects and interaction effect with offline advertising.

To understand the effect of advertising we have to consider connections and social networks.
Network size: total number of nodes
Degree: total number of links (out degree, in degree)
Density: number or real connected links / number of possible links
Path length: geodesic distance from node X to node Y

Degree centrality: number of ties that involve a given node

Closeness centrality: sum of the distance of the shortest paths between the node and all other nodes
Betweenness centrality: how often a node lies along the shortest path between two other nodes

• Degree effect: a consumer connected to many people who already bought the product has a greater
probability of purchase
• Clustering effect: the density of connection is a group of people who already bought the product has a
strong positive effect on purchases of consumers connected to the group
Measuring Marketing Performance
Marketing acquired and retain customers, introduces new products and services, builds intangible assets
such as brand equity. Marketing requires resources and investments and it can be considered costs in the
current accounting system. It takes time to realize returns of marketing because of lag effects.
The myopic management consists in underinvesting in marketing for meeting short-term goals in terms of
earning targets.
It is important for marketing managers to convince the executives such as CFO and CEO to invest in
marketing. Marketing managers understand the importance of marketing and how it works but are not well
informed about financial metrics and find difficult to communicate with other executives caused by the lack
of cost and profit implications.
We need metrics that are able to capture the long-term effect of marketing and do not directly include the
costs in the calculation. The advantage of using financial market-based measures is that it captures both
immediate and future firm performance, allow performance comparison across firms that pursue different
business goals and objectives and are less affected by the accounting conventions.

1. Tobin’s q
The ration of a firm’s market value to the current replacement cost of its assets.
It provide a measure of the premium that the market is willing to pay above the replacement costs of a
firm’s assets, thus, it captures any above-normal returns expected from a firm’s current assets.

2. Stock return
(P1 − P0 ) + D
Stock return =
P0
P0 = initial stock price P1 = ending stock price D = dividends
Stock of different firms have different levels of risks. Risk-adjusted stock returns are used.

3. Stock return risks

Systematic Risk
• The risk tied to the entire market movement
• The extend to which stock return is affected by overall markets
Idiosyncratic Risk
• The risk tied to firm-specific factors, not market factors
• The extent to which stock return is variable by firm-specific decisions or investments
High systematic risk indicates the firm’s expected cash flows are vulnerable for external shock
High idiosyncratic risk indicated high uncertainty about the expected cash flow and may put the survival of
a firm at risk

In measuring marketing performance, we seek for “causality”; the change in one variable will lead to a
change in another variable.
To assume causality we have to consider:
1. Time order: X must occur before Y
2. Association: there must be an association between X and Y
3. No alternative explanation: there must be no other competing explanations for the relationship

In experimentation the advantage of Solomon four group design is to detect the pretest effect by comparing
groups in the design. However, it requires greater costs than other experimental design because the design
requires four groups:
1. Pre-test, treatment, post-test
2. Pre-test, no treatment, post-test
3. Treatment, post-test
4. No treatment, post-test
Overview of Regression
In one sample t-test we want too see if the mean significantly differ from the test value. We need to reject
the null hypothesis to show that the test value is different from test value.
In a two-tailed t-test, you are testing the exact null hypothesis
H0 : μ = c
In a one-tailed t-test, you are testing the inexact null hypothesis
H0 : μ ≤ c

In paired sample t-test we want to see if the means of X and Z significantly differ. X and Z are for the same
people.

In independent sample t-test we want to see if groups 1 and 2 have significantly different means for X.
Group 1 and 2 are independent, i.e. different people.

ANOVA is used when we want to compare more than two groups.

F-value (score) is higher: group means differ more from the overall mean. Values within a group are closer to
the group mean. We look at the between-group variation relative to the within-group variation.
The null hypothesis is all groups have the same means. If we reject the null hypothesis, not all the means
are the same.
To find out which mean differs from the other means, we may perform a post-hoc analysis. A common test
is LSD test.

Use correlation analysis to explore the relationship between variables. Relationship are bivariate, i.e., only
two variables are considered at a time.