Fusion for Profit This page intentionally left blank Fusion for Profit How Marketing and Finance Can Work Together to Create Value Sharan Jagpal With the assistance of Shireen Jagpal 2008 Oxford University Press, Inc., publishes works that further Oxford University’s objective of excellence in research, scholarship, and education Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Th ailand Turkey Ukraine Vietnam Copyright © 2008 by Oxford University Press, Inc Published by Oxford University Press, Inc 198 Madison Avenue, New York, New York 10016 www.oup.com Oxford is a registered trademark of Oxford University Press All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press Library of Congress Cataloging-in-Publication Data Jagpal, Sharan, 1947– Fusion for profit : how marketing and fi nance can work together to create value / by Sharan Jagpal; with the assistance of Shireen Jagpal p cm Includes index ISBN 978-0-19-537105-5 Marketing—Management Marketing—Costs I Jagpal, Shireen II Title HF5415.J333 2008 658.8′4—dc22 2007049183 Printed in the United States of America on acid-free paper Dedicated to my family and friends This page intentionally left blank If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubt he shall end in certainties —Francis Bacon (1561–1626) This page intentionally left blank Foreword Fusion for Profit is a one-of-a-kind exposition of how the fusion of marketing skill and financial discipline can drive shareholder value Sharan Jagpal has written a highly readable book that is buttressed by fascinating examples and easy-to-understand “Maxims.” This superb book is a must read for anyone interested in building businesses Global and domestic markets today are highly competitive and equally complex Within this environment, firms both large and small are faced with conflicting objectives, blinding uncertainty, and multifaceted challenges, and managers are constantly struggling with confounding questions such as the following: Which products should be supported? What’s the right level of support for existing brands versus new brands? • What is the right balance between market share growth and profitability? • How should the firm measure the long-term effects of different marketing strategies? • What market does the firm really compete in? • How should one set the optimal price for a new product? • How does one figure out whether a new product is going to work or not? • What metrics should the firm use to evaluate consumer behavior? • What’s the right mix of advertising and product promotion? • • ix 622 Index cash cow, in Boston Consulting Group (BCG) model, 87 cash flows, 21 cash rebate, and prospect theory, 219–22 Casual Male Big & Tall, 415 Caterpillar, 392–93 causality reverse and, 296 two-way and, 296 central information processing, 254 CEO compensation plans See managerial compensation plans certainty equivalent (CE) demand, 271–73 profits, definition of, 12 revenue, definition of, 281 Chanel, 240 channels of distribution, 183–204 arbitrage and, 199 cooperative advertising in, 193–95 definition of, 184 distributor heterogeneity and, 198–201 effect of economic power, 185–92 effect of Internet, 196–98 effects of multiple products, 195–98 multiple exclusive distributors and, 198–200 multiple nonexclusive distributors and, 200–01 new product introduction and, 200–01 quantity-discount schedules in, 188–92 slotting fees in, 191 social welfare and, 190 strategic interdependence and, 185 transaction costs and, 203–04 vertical integration in, 201–03 Chery Automobile, 416 chief executive officer (CEO) See managerial compensation plans China Mobile, 513 choice criteria, and advertising message strategy, 252–53 choice experiments, brand equity and, 430–31 choice models economic theory and, 211 effect of consumer expectations, 211 lexicographic, 241, 570 n.2 new product forecasts and, 131–34 churn rate, 63 Cingular, 417 Citibank, 546–48, 553–54 Citigroup, 244 clickthrough fraud, 485 clickthrough metric, and Internet advertising, 485 Coase paradox definition of, 587 price skimming and, 74–75 Coca-Cola, 40, 43, 186–94, 196, 204, 261, 291–92, 378–84, 394, 396–97, 545 cognitive structures, and advertising message strategy, 251 Colgate, 281 Colgate-Palmolive, 245, 445 Comcast, 508 commoditization, by Internet, 478–83 commoditized markets, and advertising message strategy, 242 comparative advertising, 257–58 compensation policy under uncertainty See country managers; managerial compensation plans; sales force compensation plans compensatory model, definition of, 588 competition-based pricing, problems with, 137–39 complementarity, 386 complements, strategic, 386 Comtrex, 257–58 conditional net present value (NPV), 30, 399–410 game theory and, 401 real options theory and, 28–35, 399–410 Index sequential decision making and, 30–34 strategic flexibility and, 30 conditional profits, and game theory, 378 conditional reservation prices, and bundling strategy, 170 conjoint analysis, 131–34 capturing competitive effects, 133 capturing market growth, 133 estimating cannibalization effects in, 133 omitted variables in, 132–33 reservation prices and, 134 Conquest advertising, 500 Consideration sets, 244 constant absolute risk aversion, 339, 565 n.3 (chapter 6) consumer behavior, empirical measurement of, 124–56, 231–32 prospect theory and, 217–31 consumer expectations choice models and, 211–12 price skimming and, 74–75 consumer heterogeneity, and internet pricing, 481–83 consumer information structure, and social welfare, 469 consumer satisfaction, and sales compensation plans, 369 consumer surplus, definition of, 589 consumer welfare See social welfare consumers’ decision processes See information-processing strategies Contac, 258 Continental Airlines, 108, 223–24, 390–92 controlled purchase experiments, 125–27 cooperative advertising, in channels of distribution, 193–95 cooperative equilibrium, 381 coordinating price and advertising, in channels, 193–95 core competencies, 535–36 corporate cost of capital (CCC) See cost of capital corporate culture, 528 corporate image advertising, 284–85 Corvette, 48–49 cost center, and outsourcing, 560–61 cost dynamics definition of, 53 effect on compensation plans, 324–26, 345 effect on market share, 57–61 effect on pricing, 57–61 Cost of capital definition of, 27 mergers and acquisitions and, 528–29 multinational firm and, 537–38 as resource allocation metric, 27–28 cost-plus pricing, problems with, 99 costs economic vs accounting, effect of sunk, 105, 406–07 transaction costs, 203–04 country managers asymmetric information and, 545 compensation plans for, 546–48 currency paid in, 552 delegation of authority to, 543–45 four-part compensation plans, 552–53 group hedging policies and, 552 long-term compensation policy and, 546–50 real options theory and, 552–53 See also international marketing strategy coupon policy, prospect theory and, 222–23 Crest, 62, 164–69, 417–18, 430 cross-couponing strategy as bundling, 164 effect on managerial performance and rewards, 166–68 social welfare and, 169–70 cross-product marketing interdependencies, 327 623 624 Index customer relationship management (CRM) hedge funds and, 526 private equity firms and, 526 prospect theory and, 223–25 customer satisfaction, and sales force compensation plans, 369 cyclicality definition of, 590 resource allocation and, 14 data-intervalling problems, 297 day-after recall, 248 decentralized decision making under uncertainty See delegation decision-process models See information-processing strategies Deere & Company, 447–49 deferred stock options, as managerial incentive, 330 definition of market, 40 managerial incentives and, 44 organizational structure and, 41 positioning and, 42 delegation of pricing, 346–48 of selling expenses, 348 Dell Computer, 14, 28, 41, 55, 241, 365–69, 486–87, 553–54 demand dynamics definition of, 53 effect on market share, 61–63 effect on pricing, 61–63 managerial compensation plans and, 324–25 social welfare and, 445–46 word-of-mouth activity and, 56 demand-pull strategy, 278 demand-push strategy, 278 demographic segmentation, 239 differentiated oligopoly, definition of, 591 diff usion effect, 75 discount rate, definition of, 20 distributors See channels of distribution diversification economies of scale and, 507–08 economies of scope and, 508–09 international and, 527–29 managerial reasons for, 506 dividend policy, prospect theory and, 230 dog, in Boston Consulting Model, 88 dominant strategy, in game theory, 381 Dorfman-Steiner theorem, 274 DoubleClick, 501 Dove, 214 draw See irrecoverable draw; recoverable draw draw system, in compensation plans, 341–43 irrecoverable and, 342 recoverable and, 341 Dristan, 257–58 Duracell, 221–22 Dynamic carryover effects, of advertising, 293–97, 316 dynamic compensation models See managerial compensation plans; sales force compensation plans economic concept of opportunity cost, 98 economic costs vs accounting costs, economic profits definition of, 592 vs accounting profits, economic value of waiting for uncertainty to be resolved, 32 economies of scale definition of, 593 diversification and, 507–08 Internet pricing and, 476–77 market share and, 54–55 sales force compensation plans and, 343 vs learning curve, 54–55 economies of scope definition of, 593 Internet pricing and, 477–78 mergers and acquisitions and, 508 Edmunds.com, 500 elasticity advertising, 270 price, 270 Index promotion, 277 risk-adjusted advertising, 571 n.3 risk-adjusted price, 270 risk-adjusted promotion, 571 n.3 electronic exchanges, 501–02 employee turnover See turnover employment contracts See country managers; managerial compensation plans; sales force compensation plans entry-deterrence strategies limit pricing as, 63–65 sunk costs as, 406–07 equilibrium effect of information on, 383 Nash, 381 in simulated test markets (STMs), 150–52 in test markets, 152–53 event-study methodology, definition of, 593 evoked set See consideration sets exclusive distributor, 185 multiple products and, 198–200 executive compensation, 321–31 See also country managers; managerial compensation plans; sales force compensation plans exemplar brand, and market share, 67 exercise price, 325 experience curve See cost dynamics; learning curve experience curve effect, 53 experiments new product forecasts and, 149–50 simulated test markets (STMs) and, 150–52 external reference prices, 232 Exxon Corporation, 203, 508 financial leverage, definition of, 107 financial markets, prospect theory and, 229–30 firm-specific risk, 594 first mover, 33, 64 advantage theory, 66 first-degree price discrimination, and social welfare, 440–41 fi xed costs effects on brand equity, 432 new product pricing and, 101–08 focused acquisition strategy, and mergers and acquisitions, 514–15 Folger’s, 211–12 forcing contracts, and sales compensation plans, 335 Ford Explorer, 220, 94 Ford Motor Company, 400–10, 540 foreign subsidiaries See country managers; international marketing strategy franchising, 338 free samples, and social welfare, 442–43 Fructis, 247–48 game the system, 44 game theory behavioral modes of the firm and, 399 conditional net present value and, 401 conditional profits and, 378 cooperative equilibrium and, 381 cost uncertainty and, 393–96 demand uncertainty and, 399–410 dominant strategy and, 381 effect of sunk costs and, 406–07 incomplete information and, 398 long-term debt and, 390–92 multiproduct firm and, 392–93 myopic pricing and, 393–96 noncooperative equilibrium, and 381 real options and, 399–410 sequential decision making and, 399–410 signaling and, 383 strategic alliances and, 401–02 strategic flexibility and, 399–410 strategic interdependence and, 397–98 strategic pricing and, 393–96 uncertain learning curve and, 395–96 using to value mergers and acquisitions, 516–24 625 626 Index Geico, 255, 258 General Electric Company, 17, 27, 44, 553–54 General Foods, 16, 22–25, 229 General Motors (GM), 48–49, 216, 268–73, 290, 400–09, 416, 515, 536, 550–51 generics brand equity and, 414–15 quantity-discount policy and, 189–90 Gillette, 85, 88, 513, 524 Glad, 276–78 global strategies See international marketing strategy Good Humor, 293–94 goodwill See advertising goodwill Google, 11, 487–90, 492–95, 502, 508, 545 grim-trigger pricing strategy, 66 gross rating points (GRPs) models, 302–04 group hedging policies, 552 growth-adjusted multiplier, 427–28 Haier, 528, 536 halo effect, 241 Harley Davidson, 239, 324 Harvester, and sales compensation plans, 360 Head & Shoulders, 164–69 hedge funds customer relationship management (CRM) and, 526 macroeconomic effects of, 526–27 mergers and acquisitions and, 525–27 hedging strategy in advertising, 307–14 country manager and, 552 hedonic pricing model, 115–18 Herr’s, 42 Hertz, 158 heterogeneity of distributors, 198–201 and Internet pricing, 481–83 Hewlett-Packard Company, 14, 82–84, 363–64, 493–94, 555 Honda Accord, 209–11, 215 Honda Motor Company, 114, 115, 240, 270, 324, 402 horizontal differentiation, definition of, 596 human resource management compensation contracts in multiproduct firms, 327–30, 361–70 prospect theory and, 227–31 sales force turnover and, 367 See also ability; managerial compensation plans; sales force compensation plans Hunter, and sales compensation plans, 360 hurdle rate of return, and marketing policy, 17 hybrid organizational structure, and international strategy, 550 hybrid sales-based contract, 344 Hyundai, 119, 260 IBM Corporation, 68–75, 80–81, 227–28, 509–10, 515 idiosyncratic risk See firm-specific risk image advertising, 284–85 incentive compatible, 147 incentive money, 151 incentive-based contracts See country managers; managerial compensation plans; sales force compensation plans incentives, for risk sharing with borrowed funds, 525–27 See also country managers; managerial compensation plans; sales force compensation plans industry standard, and pricing strategy, 67 information-processing strategies brand equity and, 434 central, 254 peripheral, 254 information-release events (IREs), and stock value, 110 Index informative advertising, 267 social welfare and, 450–57 installed base effect, and dynamic pricing strategy, 61, 75 Instamatic, 114 intangible assets, effect on mergers and acquisitions, 509–12 integrated preference model, 148–49, 567 n.20 integration upstream (backward) or downstream (forward), 201 vertical, 201, 208 Intel, 41, 328, 384–87, 393–96 intention studies MCT methodology, and, 130–32 new product forecasts and, 127–31 no-purchase option and, 130 intention-purchase relationship, 128–31 intentions multibrand measure of, 129–30 top-box measures of, 128 internal reference prices, measurement of, 232 international diversification effect on privately held firm, 540–41 effect on publicly held firm, 539–40 international marketing strategy conditions for success, 536–37 effects of diversification, 539–41 global vs customized, 541–43 pitfalls in, 533–36 real options theory and, 552–53 See also country managers international transfer price, and mergers, 527 Internet advertising behavioral targeting and, 500–01 coordinating with sales force strategies, 494–98 effect of conquest advertising, 500 effect of electronic exchanges, 501–02 effect of measurement error on, 491–94 effect of new metrics, 502–03 pricing of, 491–95 social welfare and, 498–500 using Vickrey auction, 494 Internet advertising budgets by multiproduct firm, 490 effect of risk aversion on, 488–90 using multimedia plan, 489–90 Internet advertising message strategy, 484 Internet advertising productivity clickthrough metric, 485 measurement of, 484–87 Internet advertising vs traditional media, 486–87 Internet pricing, effects of, 475–83 B to B market and, 480–83 B to C market and, 480 bundling strategy and, 477 commoditization and, 478–83 consumer heterogeneity and, 481–83 economies of scale and, 475–76 economies of scope and, 477 one-stop shopping and, 477 iPhone, 14, 114, 243, 417 iPod, 67, 107, 246, 267 irrecoverable draw, and sales compensation plans, 342 Johnson & Johnson, 155, 242, 244, 246 just noticeable differences (JNDs), 213 Kia, 270 Komatsu, 392–93 Kraft, 32–33, 145 latent class methodology, 571 n.13 law of one price, 115 learning curve effect of uncertainty and, 58–59 game theory and, 393–96 sales force compensation plans and, 343 social welfare and, 443–44 See also cost dynamics 627 628 Index Learning curve effect, definition of, 53 See also experience curve effect Lenovo, 17, 43, 50–52, 509–10 leveraged buyout (LBO), definition of, 599 lexicographic choice model, 241, 570 n.2 Lexus, 158, 537 limit pricing, problems with, 63–65 linear profit-sharing plan, 339 long-run collaborative channel strategy, 203–04 long-term debt game theory and, 390–92 marketing policy and, 27 L’Oreal, ColorSpa, 315 managerial compensation plans country managers and, 546–48 effect of cost dynamics on, 324–25 effect of cross-couponing on, 166–68 effect of cross-product marketing interdependencies on, 327 effect of demand dynamics on, 324–25 effect of ownership structure on, 323–30 length of managerial contract and, 327 multiproduct firms and, 327–30 single-product firms and, 322–27 See also country managers; sales force compensation plans managerial incentives, and crosscouponing, 167–68 market development organizations (MDOs), 552 market portfolio, definition of, 601 market price of risk, definition of, 25 market segmentation a priori, 582 advertising message strategy and, 256–57 sales force compensation plans and, 359–61 market share effect of after-sales contracts on, 79–82 effect of cost dynamics and, 57–61 effect of demand dynamics on, 61–63 effect of process innovations on, 60–61 effect of sample selectivity bias, 49 effect of spare parts industry on, 79–82 long-term profits and, 53–55 multiproduct firms and, 78–79 as performance metric, 43–44, 49–50 product upgrades and, 83–84 profitability and, 49 quantity-discount schedules and, 54–55 resource allocation and, 43–44 secondhand markets and, 84 short-term profits and, 50–53 strategic pricing and, 47–89 switching costs and, 62 market signals consumer behavior and, 115–22 game theory and, 383 marketing channels See channels of distribution marketing concept, definition of, 601 marketing mix, 126 definition of, 601 marketing plan, definition of, 601 marketing policy capital market risk, and 15–17 measuring long-run performance of, 25–27 marketing-finance interface, 26, 35, 330–31, 505 markup pricing, 99 matched samples, 126 MCT methodology, 130–32 me-too product, 242 measurement error advertising productivity and, 304–06 reservation prices and, 134–48 measuring ability See ability Index media mix policy, 297–306 audience duplication and, 299–300 reach models and, 298–302 menu of contracts, 370–71 Mercedes Benz, 213, 479 Merck, 240, 398, 442–43 mergers and acquisitions asymmetric cost of capital and, 528–29 brand equity and, 516–24 bundling strategies and, 508 corporate culture and, 528 cost of capital and, 528–29 effect on compensation plans, 364–65 effect of intangible assets on, 509–12 game theory and, 516–24 hedge funds and, 525–27 international, problems with, 527–29 international transfer prices and, 527 managerial motives for, 506 mixed bids and, 511 performance of, 512 potential gains from, 507–09 rationale for, 506–07 results of, 512 social welfare and, 519–21 sources of synergy, 509 strategic business unit (SBU) and, 513–14 vertical integration and, 508 winner’s curse and, 512–13 Metro, 534 Microsoft Corporation, 107–08, 174–75, 450–59, 556 Vista, 108 Zune, 107 Millicom International Cellular, 513 mixed bids, in mergers and acquisitions, 511 mixed bundling strategy definition of, 158 multiproduct firm and, 163–64 mixed channel strategy, 184 mixed outsourcing strategy, 557–58 mixed wage-bonus plan, 335 mixed wage-commission plan, definition of, 602 monopoly pricing, effect on social welfare, 439–42 Morgan, Stanley, Dean Witter, 367 Motorola, 41 Razr cell phone, 41 multidivisional firm compensation plans in, 27–28, 327–30 risk-adjusted return on investment (ROI) and, 17 multilevel channels, 184 multinational firms choosing optimal product design, 541–43 market development organizations (MDOs) and, 552 organizational structure and, 550–53 multinational firms, privately held effect of lumpy investments, 541 pros and cons of international diversification, 540–41 multinational firms, publicly held danger of using cost of capital, 537–38 pros and cons of international diversification, 538–41 resource allocation criteria and, 537–41 See also international marketing strategy multiperiod contracts for managers, 33–35, 323–30 for sales force, 350–54 multiperiod strategy, prospect theory and, 222–26 multiplier method, for measuring brand equity, 426 multiproduct firm advertising message strategy and, 262–63 advertising policy and, 284–85 brand equity and, 417 629 630 Index multiproduct firm (continued) bundling strategy and, 157–80 channels of distribution and, 195–98 compensation policy in, 327–30, 361–72 cost of capital and, 35 economies of scope and, 85 game theory and, 392–93 goodwill models and, 283–84 Internet advertising budgets and, 490 managerial compensation plans and, 327–30 market share metric and, 78–89 mixed bundling and, 163–64 pricing strategies and, 78–84 resource allocation and, 86–89 risk-adjusted return on investment (ROI) and, 17 sales force compensation plans and, 361–72 scatter advertising and, 313 up-front advertising and, 313 myopic pricing definition of, 603 effect on market share, 49–53 game theory and, 393–96 MySpace, 545 Nash equilibrium, 381 national brands, and quantity-discount policy, 189–90 Nerlove-Arrow model, managerial implications of, 283, 571 n.6, 572 n.8 Nestle, 28–34, 145, 225, 245 net present value (NPV) conditional, 30 definition of, 21 effect of strategic flexibility, 28–33 NetFlix, 510–11 network externalities, definition of, 603 new product(s) advertising message strategy and, 259–61 channels and, 200–01 social welfare and, 469–72 See also new product pricing new product forecasting role of consumer perceptions and, 148–49 test markets and, 152–55 using experimental data, 149–50 new product pricing bankruptcy and, 11–12 cannibalization and, 108 fi xed costs and, 101–08 long-term debt and, 106–08 ownership structure and, 99–108 prospect theory and, 222–23, 225–26 sunk costs and, 105 News Corp., 545 Nielsen Internet advertising and, 502 Media Research, 306 rating score, 305–06 Nike, 246 Nine West, 9, 11 Nissan, 118, 324–26, 402, 422 no-purchase option, effect on conjoint models, 130 Nokia, 61–62, 74, 533 nonaccounting costs, noncooperative equilibrium, in game theory, 381 nonexclusive distributor, 185 effect on manufacturer, 200–01 multiple products and, 198–200 nonrecoverable draw See irrecoverable draw non-selling activities, effect on compensation contracts, 348 normal distribution, and niche markets, 136 Noxema, 216 Ocean Spray Cranberries, 515 one-stop shopping, 164 Internet pricing and, 477 opportunity costs, 98 Index accounting profits vs economic profits and, options See real options theory Oracle, 62 Oral-B, 524 outsourcing, 33, 553–62 controlling turnover and, 558 dangers of cost-minimization strategies, 554 geographical diversification and, 558–60 metrics to maximize long-run performance, 561–62 mixed strategy and, 557–58 as profit centers, 560–61 real options theory and, 33 strategic flexibility and, 557 use of multiple performance metrics, 555–57 ownership structure advertising strategy and, 277–74 managerial compensation plans and, 323–30 risk metric and, 10–17 panel, and test markets, 152–53 part worths, 131, 566 n.4 (chapter 8) payoff matrix, in game theory, 379 Pepsi, 291, 378–83, 397 Pepsico, 9, 40, 202, 515 perceptions, measurement of using integrated approach, 148–49, 567 n.20 perfect price discrimination, 70 effect on social welfare, 440–41, 470 performance contracts See managerial compensation plans; sales force compensation plans performance-based fees in hedge funds, 526 in private equity firms, 526 peripheral information-processing, 254 persuasive advertising, 267 social welfare and, 457–58 Pfizer, 8, 256, 398 Pharmacia Upjohn, piece rates, and sales compensation plans, 335 pioneering advantage theory, 66 pioneering brand, and strategic flexibility, 67 Pizza Hut, 536 Polaroid Corporation, 113 positioning, 42 preannouncements effect on stock prices, 110 ownership structure and, 109–11 signaling and, 110 predatory pricing, 65–66 preference model, integrated See integrated preference model preference studies, new product forecasts and, 131–34 present value See net present value price (pricing) advertising message strategy and, 242–43 assimilation-contrast theory and, 213 bundling strategy and, 157–80 capital market risk and, 15–17 in channels of distribution, 183–204 coordinating with advertising under certainty, 269–74, 282–84 under uncertainty, 280–82, 284 coordinating with product design, 346 coupons and, 223–26 delegation by firm and, 346–48 effect of Internet, 475–83 prospect theory and, 219–26 as signal of quality, 119–22 skimming and, 68–76 See also strategic pricing price delegation, and sales force compensation plans, 346–48 price discrimination, and social welfare, 440–41 price dispersion and commoditization, 478–83 effect of Internet, 478–83 price elasticity, 270 price signaling, 119–22 631 632 Index price skimming, 68–76 definition of, 71 as price discrimination strategy, 71 price-advertising policy under certainty, 269–74, 282–84 price-advertising policy under uncertainty, 280–82, 284 private equity firms customer relationship management (CRM) and, 526 macroeconomic effects of, 526–27 mergers and acquisitions and, 524–27 performance fees and, 526 privately held firm discount rate for, 24–25 gains from international diversification, 540–41 measuring risk in, 15–17 problem children, in Boston Consulting Group (BCG) model, 88 process innovations, effects of, 60–61 Procter & Gamble, 27, 100, 164–69, 199, 222, 275, 324, 420–21, 430, 513, 524, 538, 550–52 producer welfare, definition of, 607 product announcements, 109–11 product design coordinating with advertising, 346 coordinating with marketing mix under uncertainty, 346 product life cycle advertising goodwill and, 283–84 advertising strategy and, 275–79 social welfare and, 458–60 product positioning, 42 advertising message strategy and, 239–46 definition of, 238 product preannouncements, and stock value, 110 product profile, definition of, 131 profit center, and outsourcing, 560–61 progressive slab system, 343 promotion elasticity, 277 prospect theory bonus plans and, 227–28 business cycle and, 226–27 cash rebates and, 219–22 comparison to standard economic theory, 211–12 coupons and, 223–26 customer relationship management (CRM) and, 223–25 dividend policy and, 230 implications for financial markets, 229–30 implications for human resources managers, 227–31 multiperiod strategy and, 222–26 new product pricing and, 222–23, 225–26 sales compensation plans and, 228–29 psychographic segmentation, 239 publicly held firm discount rate for, 24–25 gains from international diversification, 539–40 measuring risk in, 15–17 pure bundling strategy, definition of, 158 pure commission plan, 335 quality, measurement of, 113–14 quality-adjusted cost ratios, 469 quantity-discount schedules, in channels of distribution, 188–92 social welfare and, 446–48 Quicken software, 163 quota system, in compensation plans, 335 recoverable draws and, 342 sales call policy and, 363–64 Razr, 41 reach, measurement of, 299–302 reach models, 298–302 Reaction curve, 384 RealEstate software, 163 real options See real options theory real options theory, 29–35 Index country managers and, 552–53 managerial compensation and, 33–35 marketing policy and, 29–33 outsourcing and, 33 stock options and, 34–35 strategic flexibility and, 29–32 test markets and, 29–32 recoverable draw, in sales compensation plans, 341 reference brand, 67 See exemplar brand reference point, 222 measurement of, 232 reference prices, 216 dynamic pricing and, 222–25 external, 232 internal, 232 measurement of, 232 prospect theory and, 222–25 regressive commission plan, 344 relationship segment, 359 reservation income, definition of, 334 reservation price, 72 biases in measuring, 140–41 brand-equity effect and, 140 bundling strategy and, 157–80 definition of, 609 effect, in advertising models, 278 estimating using auctions, 146–48 estimating using choice models, 141–46 new product forecasting and, 139–48 price-skimming strategy and, 68–76 self-stated measures of, 139–41 social welfare and, 457–58 reservation price effect, 278 retiring long-term debt, effect on pricing, 27, 390–92 return on investment (ROI) definition of, marketing policy and, 7–10, 14–17 multiproduct firm and, 8–9 as performance metric, 8–9 privately held vs publicly held firm, 15–17 privately owned firm and, 10–13 publicly held firm and, 13–15 risk-adjusted, 17 uncertainty and, 9–10 return on the market portfolio, 312 reverse causality See two-way causality reverse engineering, and price skimming, 64 risk multidivisional firms and, 17 multiproduct firms and, 17 as resource allocation tool, 13–15 systematic, definition of, 615 unsystematic, definition of, 594 See also firm-specific risk risk, firm-specific, 594 See also idiosyncratic risk; unsystematic risk risk aversion advertising message strategy and, 245 definition of, 12 Internet advertising budget and, 488–90 up-front advertising and, 307–09 risk, idiosyncratic See firm-specific risk risk, systematic, definition of, 615 risk neutral, definition of, 11 risk premium, definition of, 12 risk seeking, definition of, 105 risk-adjusted advertising elasticity, 571 n.3 risk-adjusted discount rate, definition of, 610 risk-adjusted economic profit, 195 risk-adjusted elasticity, 270 risk-adjusted price elasticity, 270 risk-adjusted profit, definition of, 611 risk-adjusted promotion elasticity, 571 n.3 risk-adjusted rate of return see riskadjusted discount rate risk-adjusted return on investment (ROI) definition of, 611 633 634 Index risk-adjusted return on investment (ROI) (continued) as hurdle rate, 17 market segmentation and, 14 multidivisional firms and, 17 multiproduct firms and, 17 as resource allocation tool, 13–15 Rohm and Haas, 200–01, 416 Rolls-Royce, 14–15 sales call policy, 334 sales force compensation plans asymmetric information and, 363 competitive labor market and, 340 effect of cost structure on, 342–44 effect of customer satisfaction on, 361 effect of Internet on, 348–50 effect of learning curve on, 345 effect of mergers on, 364–65 hybrid sales-based contract and, 344 market conditions and, 346 market segmentation and, 359–61 menu of contracts and, 370–71 mixed-wage bonus plans and, 337 multiperiod contracts and, 350–54 multiproduct firm and, 361–72 non-selling activities, and 348 observable effort and, 335–40 price delegation and, 346–48 progressive slab system and, 343 regressive commission plan and, 344 relationship segment and, 359 shirking and, 338 three-part formula and, 369–70 transaction segment and, 359 turnover and, 367 unobservable effort and, 338, 363 See also managerial compensation plans sales force productivity measurement of, 366–72 sales as metric for, 367 sales force strategies, and internet advertising, 495–98 sales force turnover, 367 sales response function, 315 sales revenue-based contract, definition of, 611 sample selectivity bias, and market share studies, 49 Samsung, 6–8, 56, 377–78, 516–23 SAP, 62 scatter advertising, 307–14 advertising-rate uncertainty and, 314 competitive reaction and, 311 effect of Internet on, 313–14 effect of ownership structure on, 311–13 effect of risk aversion, 307–09 factors influencing and, 309–12 multiproduct firm and, 313 pricing of, 307–14 vs up-front advertising, 307–14 Scion, 438–41 secondhand markets, and social welfare, 469–72 sequential market entry strategy, and game theory, 399–410 served market See addressable market share of voice, definition of, 612 shirking, and sales force compensation plans, 338 signaling game theory and, 383 pricing and, 119–22 simulated test markets (STMs), 150–52 equilibrium in, 152 equilibrium repeat rate, 153 equilibrium trial rate, 153 slab compensation system, 343 slotting fees, in channels of distribution, 191 social welfare advertising and, 448–64 awareness effect and, 450–57 brand manager and, 468–69 bundling and, 464–68 channels of distribution and, 190 comparative advertising and, 460–64 cross-couponing and, 169–70 Index definition of, 437–39 demand dynamics and, 445–46 effect of learning curve on, 443–44 free samples and, 442–43 Internet advertising and, 498–500 mergers and acquisitions and, 519–21 new products and, 469–72 price discrimination and, 440–41, 470 product life cycle and, 458–60 profit maximization and, 439–42 quantity discounts and, 446–48 reservation price effect and, 457–58 secondhand market and, 469–72 sequential new product introduction and, 469–72 socially neutral, definition of, 613 Sony Corporation, 134–39, 142–43, 377–78, 493–94, 516–23 Southwest Airlines, 40 spillover effects, and market share, 59 spot market, definition of, 613 Stanley, 132, 196–97 stars, in Boston Consulting Group (BCG) model, 87 stock options, 34 strategic alliances, 160 bundling and, 160 game theory and, 401–02 share value and, 515–16 strategic business unit (SBU), 513–14 strategic complements, 386 strategic flexibility, 28 game theory and, 399–410 net present value (NPV) criterion and, 28–29 outsourcing and, 557 real options theory and, 29–35 strategic interdependence, and game theory, 397–98 strategic pricing, 47–89 cost dynamics and, 57–60 definition of, 57 demand dynamics and, 61–63 experience curve and, 57–60 game theory and, 393–96 learning curve and, 57–60 market growth and, 55–57 technological uncertainty and, 59–61 substitutes, strategic, 387 sunk costs game theory and, 406–07 product pricing and, 406–07 supply chain, pricing and, 183–204 switching costs, and market share, 61 switching regime regression model, 295 systematic component of cash flows, definition of, 615 systematic risk, definition of, 615 tapered vertical integration, 202 mergers and acquisitions and, 508 tax shield from debt, and compensation plans, 552 technology shifts, effects of, 59–61 test markets accuracy of, 154–55 limitations of, 155 new product forecasts and, 152–55 threshold effects of advertising, 289–90 of perceptions, 213 time-additive utility functions, 574 n.6 Tobin’s q-ratio, 429–30 definition of, 429 as measure of brand equity, 429–30 top-box method, 128 top-down approach, for resource allocation, 330–31 top-two box method, 128 Toshiba, 136–39, 142–43 Toyota, 14–15, 68, 114–15, 275, 422–24, 438–42, 501, 537 Camry, 208–11 Corolla, 171, 479 trade-off model, definition of, 616 transaction costs, 203–04 transaction segment, 359 635 636 Index transaction utility (TU) definition of, 211 measurement of, 231–32 prospect theory and, 222–32 Travelers Insurance Co., 244 trial rate, 151 top-box method and, 128 top-two box method and, 128 TurboTax software, 163 turnover, and sales compensation plans, 367 two-way causality, 296 U-shaped cost curve, and sales compensation plans, 344 umbrella branding, definition of, 616 unaided recall, 247 vs aided recall, 247–48 undifferentiated oligopoly, definition of, 616 Union Carbide, 145 United Airlines, 158 unobservable effort, and compensation plans, 363 unobserved characteristics, in market segmentation studies, 576 n.7 unsystematic risk See firm-specific risk up-front advertising, 307–14 advertising-rate uncertainty and, 314 competitive reaction and, 311 effect of Internet on, 313–14 effect of ownership structure, 311–13 effect of risk aversion, 307–09 factors influencing and, 309–12 multiproduct firm and, 313 uptime probability, and outsourcing, 556 utility functions for risk-averse firms, 103 for risk-neutral firms, 102 for risk-seeking firms, 106 time-additive, 574 n.6 value proposition, 258 value-added bundles, 482 Verizon, 84, 158, 218, 465–68 vertical differentiation, definition of, 617 vertical integration backward or upstream, 201 forward or downstream, 201 mergers and acquisitions and, 508 tapered, 202 Vickrey auction, and Internet advertising, 494 Vicks, 248, 251, 416 Vista, 108 volatility, of cash flows, 24 volume-based market share, and pricing strategy, 57–61 Volvo, 42, 244, 253 Vonage, 508 Wal-Mart, 191–92, 259, 534–35, 551 Whirlpool, 528 willingness to pay (WTP), 72 See also reservation price winner’s curse, and mergers and acquisitions, 512–13 word-of-mouth effect, as demand dynamics, 56 XM Satellite Radio Holdings, 63 Yahoo, 85, 329, 485, 489–90, 495, 502 Finance, 500 SmartAds, 501 zero economic profits, in channels See economic profits zune, 107 .. .Fusion for Profit This page intentionally left blank Fusion for Profit How Marketing and Finance Can Work Together to Create Value Sharan Jagpal With the assistance of Shireen Jagpal 2008 Oxford... 1947– Fusion for profit : how marketing and fi nance can work together to create value / by Sharan Jagpal; with the assistance of Shireen Jagpal p cm Includes index ISBN 978-0-19-537105-5 Marketing Management... firm To make the ideas in Fusion for Profit readily accessible to students, all topics are discussed using a question -and- answer format How Should You Read Fusion for Profit? Fusion for Profit can