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What should market planning cost?
WHAT SHOULD MARKET PLANNING COST? Information collection must stop somewhere
W. DICKERSON HOGUE
Mr. Hogue is a senior lecturer in International Business at Indiana University. A marketing manager faced with even a relatively simple problem possesses no more than a tiny fraction o f the possibly relevant information. Worse, he can never be sure he has enough to formulate the optimum solution the one most profitable in the short, medium, and long run. The amount available approaches infinity, and to collect it wouM require nearly infinite resources. He must decide whether he needs more, bearing in mind that the costs o f getting it shouM be offset by the increased value o f the final plan. The author suggests a formula for helping decide whether additional facts are needed. He also examines such issues as underspending and overspending, underestimating low-volume opportunities, testing low-cost planning, and the need for experience.
Any marketing manager making a marketing decision would like to come up with the optimum solution-the solution most profitable in the short, the medium, and the long term. How closely he will approach such a happy ending will be determined largely by his skill in gathering information related to the problem. At this point, his problem assumes its most formidable aspect: the amount of relevant
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information approaches infinity and to collect all of it would require nearly infmite resources. The manager must, therefore, decide whether or not he should obtain more information. If he believes that he does indeed need more information, he must then decide what kinds to obtain and how much of each kind. His guiding principle in such decisions must be that the costs of more information should be offset by the increased value of the final marketing plan.
THE COMPLEXITY OF THE PROBLEM On any given marketing problem, no marketing manager has enough information to be absolutely certain that his solution is the optimum one. Staggering amounts of information would be required to achieve this goal for even a relatively uncomplicated choice. For example, suppose a marketing manager has as part of a broad marketing plan, the relatively trivial task of choosing the best shade of red for a package design for a product to be sold principally through self-service stores. He will probably collect four kinds of information. First, he will have at hand the results of consumer research on the over-all package
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design and its subordinate elements, including the red portion. Typically, the company researchers would have interviewed 300 housewives, perhaps in Kansas City, choosing the homes or aparIments representative of economically middle-class U.S. urban housing. Unless the product is aimed specifically at men or young single women, these groups would not be interviewed. Working wives would not be represented, nor would the upper and lower economic classes (say, 5 percent and 10 percent respectively of total population) or rural families. Second, the marketing manager will have the opinion of the package designer concerning the choice of tone and intensity of red in his original design and the accuracy of its reproduction on the first printed sample packages. Third, the opinions of the various marketing managers concerned would have been collected. These opinions are probably inferred from the comment or lack of comment on the red colors in the original hand-drawn design and the first samples of printed packages. Last, the marketing manager will need the opinions of the company's ink buyer and the salesman for the ink supplier. These two would have worked together briefly to find an ink that had printing characteristics, scuff resistance, fade resistance, cost, and so on in normal ranges, and that would yield a printed red corresponding to the one in the original package design. This is, of course, quite a lot of information to have about one small detail in a marketing plan. Think, however, of the tremendous amount of information the marketing manager would need before he could approach 100 percent certainty that his choice of red is the optimum choice instead of just a satisfactory one. Every tone and shade of every hue of red would have to be tested at every intensity of color, under every potential lighting condition, in comparison with every other package design that might be put next to it on a dealer's shelf, and in the opinions (weighted according to consumption) of large numbers of people representing potential consumers of both sexes and
all ages, economic and cultural backgrounds, and degrees and types of eyesight! Worse, each possible ink would have to be tested in this way at various package ages (when the ink had faded or otherwise changed) after each ink had been subjected to each possible combination of temperature, humidity, and abrasion in shipping or handling, for example. After all this testing to compare various red inks on the basis of their effects on consumers, there would still be the other side of the cost-benefit equation to examine. What would be the comparative cost of buying and printing each ink? How would each ink affect the quality of the product or packaging? What would be the risks (costs) of nonavailability? What would be interest charges and storage costs on inventory? Would any ink necessitate changes in the planned production process and, if so, what would be the costs? Obviously, a marketing manager faced with even a relatively simple problem possesses no more than a tiny fraction of the possibly relevant information. No marketing manager with profit responsibility, however, would w a n t to collect all the possibly relevant information: "It would cost so much we just couldn't make a dime." Instead, he hopes to have before him what he considers sufficiently accurate information on what he considers the most important aspects of his problem.
MORE INFORMATION NEEDED? A senior marketing manager working on a complex plan, such as one for introduction of a new product, will probably suggest increasing in specific ways the information supporting the recommendations first presented to him. Every marketing man has frequently heard, in marketing discussions, such statements as, "The plan sounds good over-all, but there are one or two aspects where probably we should have more consumer research," or "Fine, but let's ask Joe's people to recheck that one part of the plan we've been discussing, and see if they can't tighten up those estimates."
BUSINESS HORIZONS
What ShouM Market Planning Cost?
On the other hand, a senior marketing manager probably rejects some of his subordinates' suggestions that additional information be obtained, with such explanations as: "No, I d o n ' t think we can ask Jim and his people to put any more time on that question"; "Good point, but we just can't afford to wait for that data before deciding on this"; "I see what you mean, but it doesn't seem worth another $10,000 to check that point further"; or "Well, a perfect plan it isn't, b u t it seems sound enough to me. I think we have all the bases pretty well covered. Let's go on it." How can we describe the way a marketing manager decides whether or not to obtain certain amounts of certain types of additional information? I believe this formula is the tool used, consciously or unconsciously, by the manager: C should be ~< W l - W This is a statement of the obvious truth that the cost of additional information should not exceed the additional value of a plan which is based on the additional as well as the previous information. (Detailed definitions are in the box below.) The estimated value (W or Wl) of a plan is calculated as: W = PxV - ( P I x F ) This formula states that the estimated value
of a plan depends on several subjective estimates-a subjective estimate of probability of success multiplied by a subjective estimate of the value of success, less the total of a subjective estimate of probability of failure multiplied by a subjective estimate of the cost of failure. As an illustration, suppose the marketing vice-president of a food products firm is studying the recommended plan for the introductory marketing of the company's new brand of breakfast cereal. The plan has been presented to him in the format standard in his company. Its 100-plus pages cover the results of hundreds of tests and investigations into various aspects of the p r o b l e m - c o n s u m e r acceptability of the product, production, Finance, purchasing, sales, packaging, advertising, promotion, legal, trademark, patent, and so on, plus forecasts of such items as dealer and consumer purchases, timing, and Financial results. As he reads each item, the marketing vice-president considers, in the light of his experience, its relative importance in the over-all plan. He also considers whether he is satisfied that enough work of the right sort has been done to ensure that the recommendation concerning each item is sufficiently likely (considering its relative importance) to be correct. During his examination he notes several
DEFINITIONS OF FORMULA TERMS USED C = The cost, after taxes, of obtaining additional information. Cost included not only expenditure of money, but also opportunity cost-profits foregone either because manpower was used on this project rather than on other profitable projects or because the delay incurred by additional work on this project meant giving competitors an increased share of the future market. "Should be ~ " = "Should be limited by" or "should be less than or equal to." W (The expected present value of a plan before additional information is collected) = (PxV) - (PI xF) where P = The weighted average of a range of subjectively determined probabilities of "success" of a particular plan based on all the information now available. V = The weighted average of a range of subjectively determined values of "success" of a particular plan based on all the information now available. The values are calculated as expected future earnings, after taxes, discounted to their present values. P1 = 1.0 minus P. F = The weighted average of a range of subjectively determined costs (expected future losses, after taxes, discounted to their present values) of failure of a particular plan based on all the information now available. Wl (The expected present value of the plan after alterations based on the additional information collected) is calculated in the same manner as W. The values of one or more of' P,V,P1, and F are changed because of alterations made in the previous plan.
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items that need more work before the recommendations are well-founded. Also, he has formed somehow-probably partly consciously, but certainly to a large extent subconsciously or intuitively-various estimates concerning the risks and rewards of implementing the plan. A marketing manager may or may not use numbers to express his estimates, but each can be expressed numerically. In this particular case, the marketing vice-president has made several estimates. First, in general, to implement the recommended plan as it stands would have a range of probability of success from at best .95 to at worst .45, with a weighted average probability of success of .75. Knowing his company's circumstances, he defmes success as profitability in each year of established life of the new brand of more than $400,000 before taxes (any brand earning less would not be worth keeping in his company's current line) plus the absence of any important unpleasant effects (such as antitrust or other major legal action, damage to company reputation, or loss of morale among company employees) which would be so costly in money terms that they are unacceptable. Second, in general, success of the recommended plan as it stands now would have a present worth to the company somewhere in a range of $1,200,000 minimum to $10,000,000 maximum, with a weighted average of $4,500,000. He has reached these figures by considering the probable length of life of the brand and its profitability year-by-year at each level of success, and by discounting future profits, after taxes, back to present values. Third, probabilities of failure are the reciprocals of the probabilities of success. At worst, failure is .55 probable, at best it is .05 probable, and the weighted average probability of failure is .25. Fourth, part of the cost of failure can be more objectively estimated (for any particular length of time after the start of implementation before the failure is recognized as such) than the other factors. In fact, the recommendation of the introductory plan probably included a
page of estimates of losses to the company in case of cancellation of the plan at various stages of implementation. Looking at the estimates, which range from a $35,000 loss, after taxes, at the earliest stage of implementation up to a maximum $4,000,000 loss, after taxes, at peak investment, the marketing vice-president uses a $2,500,000 loss as the subjectively determined weighted average cost of failure. Putting these figures into the right-hand side of our equation, the expected present value to the company of implementing the plan as it now stands is, in the opinion of the marketing vice-president: (.75 x $4,500,000 - (.25 x $2,500,000) or $3,375,000 - $625,000 or $2,750,000. It seems a worthwhile plan. The marketing vice-president is, however, concerned at this point whether the plan's value to the company might be increased at reasonable cost. In recent years, about 80 percent of all new products introduced by his company in test markets have been expanded to additional markets within twelve months without major changes in the original plan. By estimating only .75 probability of success for the plan now before him, he is saying the plan has a below average probability of success. Therefore, despite the estimated $2,750,000 value he has assigned the plan, he is dissatisfied and is anxious to increase its value. He considers, therefore whether additional information could be obtained at reasonable cost, which would form a basis for altering the plan so that one or more of the following might be achieved: An increase in the weighted average probability of success. Each .01 increase, with the values of success and failure remaining as now, would be worth $70,000. An increase in the weighted average value of success. Each $100,000 increase, with the other factors remaining as now, would be worth $75,000. A decrease in the weighted average cost of failure. Each $100,000 decrease, with the other factors remaining as now, would be worth $25,000. A reduction in the company's risks. Probabilities of success of the plan as it stands seem
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What ShouM Market Planning Cost?
to range around a weighted average of .75, from .95 down to .45. At the lower end, the present plan is worth only $650,000, that is (.45 x $4,500,000)-(.55 x $2,500,000). Can he get, at reasonable cost, additional information which might or might not form a basis for altering the plan, but which would shrink the lower end of the estimate of the range of probability of success? Even if weighted average probability were to remain the same at .75, the company's risks would be sharply reduced if the range of probability ran from .95 down only to, say, .60 instead of the original .45. With these concerns in mind, the marketing vice-president turns to the notes he made of what seemed weak points in the recommended plan. A few of these are parts of the plan where he feels the information is sufficient but that the wrong conclusions-or, at best, shaky conclusions-have been reached. Weak points of this type are normally corrected without much difficulty by discussion among the company's marketing managers concerned with the plan. Most of the weak points, however, are of another type. They are parts of the plan where insufficient information has been collected, considering the importance of the parts to the success of the total plan and considering the probable cost of additional information. They are parts of the plan where the conclusions seem right, based on the information available, but where the amounts or types of available information do not seem sufficient to form the basis for satisfactorily firm conclusions. To correct this type of weak point to the marketing vice-president's satisfaction, certain subjectively determined amounts of certain subjectively determined types of additional information must be collected and conclusions redrawn based on the new total available information. Collecting the new information will cost roughly foreseeable amounts of time and money. After additional information is obtained, the marketing vice-president may decide he needs still further information to come to satisfactorily firm conclusions. The information collecting process stops, in fact, only when the marketing vice-president (and also, perhaps, his superiors in the company) feels the costs of
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additional information would not be at least equalled by a resulting increase in the expected value of implementation of the total plan.
THE NEXT STEPS The thought process described is central to marketing planning (and a number of other types of planning). The nature of its structure has led to several observable results.
The "Standard" Procedure The process is so complex that it would be intolerable for each marketing man to go through it for each item he considers in working on a solution to a marketing problem. However, the process is a vital one. Most companies and marketing managers seem to resolve this dilemma by adopting "standard" methods of collecting information as bases for attacking marketing problems that are frequently encountered. That is, the thinking process is institutionalized by establishing a number of standard procedures for collecting information and planning. In a large, longestablished company there is almost always a rigidly specified "company way" to approach each type of marketing problem which comes up frequently.
Underspending and Overspending Companies in competitive industries where marketing skill is crucially important may not be spending correct amounts of time and money on information collection. The most successful companies, particularly if long established, are in danger of overspending, while the less successful ones tend to underspend. Naturally, a successful, long-established company tries to repeat processes that led to past successes and avoid processes that led to past failures. As a result, its current marketing
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plans are based on similar amounts of information of the same types used previously plus information in types and amounts that, in hindsight, would have enabled the company to avoid recent past failures. The result is a kind of ratchet action, which tends to increase the amount of information collected for a given kind of plan in a successful company, as safeguards against recurrence of the latest failures are added to the standard information. Institutionalized standard plans tend to become ever more costly. Company finances do not limit this ratchet action, since a successful company can support increased planning costs. The marketing managers themselves are not inclined to limit the ratchet action; their personal success depends heavily on the success of their marketing plans, and any additional relevant information-no matter how much of the company's money it costs-may help them avoid a failure. The owners of the company and the nonmarketing managers do not limit the ever-increasing cost of marketing planning; the company's success depends on marketing, the company has been successful to a certain extent, and who can quarrel with success? It is doubtful, then, whether a successful marketing company is as suspicious as it should be of the real justification for spending time and money on collecting so much information. On the other hand, surviving but less successful companies that depend on marketing skill are apt to view with skepticism the high costs of detailed marketing planning. In many companies producing branded items that sell mainly through supermarkets in the United States, it is standard in the marketing planning for, say, the introduction of a new brand, to spend a minimum of two years and hundreds of thousands of dollars in information collection. In many cases, information collection and planning has taken four or five years and has cost millions. A company hard-pressed for profit growth and doubting (because of its recent ratio of marketing successes to failures) that its marketing managers are highly skilled tends to question sharply whether it is justifiable to spend additional time and money to
collect more information for a particular plan. Since the only possible justification is the top marketing manager's opinion and an objective defense is hard to fred, there is an excellent chance the company will spend less then he feels it really should.
Underestimating Low-Volume Opportunities The marketing managers of the large U.S. operations of a successful long-established company naturally tend to underestimate the probabilities of success of marketing planning less expensive than is standard in their company's experience. This frequently leads them to neglect relatively small volume opportunities in and, especially, outside the United States. Their feeling concerning these individually small opportunities is that the volume would not be large enough to support the costs of the marketing planning and top management time necessary to handle the business properly. This feeling may or may not be justified. Especially outside the United States competitors for lower volume markets are likely to have less money to spend on marketing planning and to be less skillful in marketing then competitors for high volume U.S. markets. Where this is true, a marketing planning procedure less expensive and less skillful than that used in the United States may have a high probability of winning a profitable share of the market.
A Test of Low-Cost Planning I had an unusual opportunity to test this proposition in handling a large U.S. company's operations in more than a hundred foreign markets over a period of twelve years. The average number of brands sold in each market was about five, so there were over 500 individual marketing situations observable in each of many years. Unit salesin these situations ranged from about 300 to over 300,000 per year. Assuming 75 cents per average unit sold was available to handle all aspects of marketing management (including travel, reporting to
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What ShouM Market Planning Cost?
headquarters, and so on in addition to information collecting and planning), annual amounts of money available for marketing management in each of the individual marketing situations ranged from $300 to $250,000. Thus, the types and numbers of marketing problems were more or less similar in each situation, but widely different amounts of money were available to solve them. In these circumstances, the key to profitability of the over-all operation was to make marketing decisions that were correct a profitable percentage of the time while holding the costs of information collecting and marketing planning within the money available in each situation. What developed was that given (1) the availability of marketing managers with substantial experience and motivation but only average skill and (2) that a brand had about the same market share in one market as in another, costs of marketing management of a brand in a market could be kept in ratio to its sales volume. At the same time, the percentage of success of marketing plans was similar to that for the same brand in other markets. Most of the time, one could expect that spending $500 on information and planning to solve a marketing problem of type A (say, planning a consumer promotion) on Brand X in a market with 10,000 units of annual sale volume would have roughly the same probability of success as spending $5,000 on planning to solve a type A problem for Brand X in a market with 100,000 units of annual sales volume. The relationship was, of course, not absolutely linear across the whole range of sales volumes. To have the same percentage of success, it seemed necessary to spend about 20-25 percent more per unit on planning in the smallest marketing situations than in the average. A minimum of mechanical action-f'fling, writing a letter, and the like-with a certain fixed cost is involved in every marketing plan of a certain type, no matter what the cost of planning has been. Similarly, to ensure that failures are recognized promptly there must be a minimum fLxed cost of reporting incurred in even the smallest marketing situations. On reflection, this nearly fixed relationship
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of cost of marketing planning to sales volume, at a certain percentage level of marketing success, seems reasonable because it indicates that the percentage of success is determined more by the level of marketing competition than by an absolute standard of amounts and kinds of information. In addition, competitors in a certain market faced similar constraints on their costs of marketing planning.
Improving Planning Efficiency One deduction from these observations is that the most profitable way to increase marketing success versus competitors is not to spend additional amounts per unit on marketing management but to try to improve the efficiency with which the given amount is spent. (Admittedly, the 75 cents per unit is an arbitrary figure that seems workable for the brands I handled but is quite possibly too high or low.) If relevant existing information (say, previous results of varying types of promotion in various types of market) is made readily available to marketing managers, they should be able to increase their percentages of success at no increase in planning cost. Also, if marketing managers are encouraged to think in terms of cost of information and probabilities of success and expected values of success, rather than in terms of absolute standards, they should be able to increase their percentages of success with little or no increase in planning cost. An example is consumer research. Suppose a marketing manager feels a certain type of consumer research is. not valid by some arbitrary standard of validity, unless X number of consumer interviews are made by researchers trained to quality level Y and using a questionnaire prepared by specialists trained to quality level Z. If any other research is "not valid," then the marketing manager has no way of estimating consumer reactions to a product change in one of the small, less developed nations where there are no professionals in consumer research and a brand's total annual budget for all marketing management is less
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than would be the cost of one "valid" survey. Instead, the marketing manager should think of his company's U.S. standard of research not as the only valid way but as a method intended to produce over-all results accurate within three percentage points 95 percent of the time in the United States. Then he may be led to find some inexpensive way of testing consumer reaction in the less developed country. He might use a smart local salesman, completely untrained in research, as his researcher to ask one or two simple questions of twenty or thirty women at each of four or five open-air markets in the capital city. Total time required, perhaps two days. Total cost, including tabulation, perhaps $25-30. As long as the marketing manager takes care not to equate such loosely designed and loosely controlled research with his company's standard research in the United States, it may be very useful to him. As long as he is careful to view the results not as being "valid" but as having, say, 75-80 percent probability of being correct within four or five percentage points for women of a certain class (open-air market buyers) in that city, he may well have some extremely useful information.
The Need for Experience No matter how intelligent and well-educated a newly-hired marketing man may be, he will need considerable working experience before he can do an acceptable job as the top marketing manager of a company in a competitive industry where marketing skill has substantial influence on a company's results. Subjective estimates are essential at several points in the process of making marketing decisions, and experience is the only raw material on which these estimates can be based. Further, because distribution channels, consumers, media, and many other important elements in the marketing process may differ widely from one product type to another, successful experience as a top marketing manager for one product type does not assure immediate success as a top marketing manager
for another. A marketing manager with a highly successful experience in women's shoes would probably flounder initially as a marketing manager for children's toys or frozen orange juice. His successful previous experience should enable him to organize his thinking about a new product type much more quickly and effectively than a man with no marketing experience. Still, it will take considerable time before he feels comfortable about his estimates in his new field.
lmlt J l ,he ost of oUta o aaa t on.
Ih II information on which to base a marketing decision should be limited by how much it is expected to increase the value of the decision. The amount of information possibly relevant to any particular marketing problem at a particular time approaches infinity; to collect all of it is unfeasible. In addition, it is impossible to foresee the circumstances in which any particular marketing decisiort will be implemented. Many will closely resemble previous and current circumstances, but many will be different. Many of the future circumstances will exert the same relative influences on the success of a marketing project as before, but many will not. The marketing manager's role in his company, in considering any marketing project, is to weigh the costs of obtaining various types and amounts of additional information against a combination of: Subjective estimates of which future circumstances will influence the success of the project and what the degree of influence will be Subjective estimates of the degree of certainty as to the exact nature of at least the most important future circumstances Subjective estimates of the likelihood of each of various degrees of success of the project and how much money each of the degrees would be worth to the company Subjective estimates of the likelihood of various degrees of failure of the project Subjective estimates of the likelihood that failure of the project will be recognized at each stage of implementation (these estimates are to be combined with more-or-less objective estimates of the cost of failure at each of the stages of implementation).
BUSINESS HORIZONS
What ShouM Market Planning Cost?
The marketing manager then creates a marketing plan of optimal value (calculated as being the maximum of expected value of implementation less the cost of informationcollection and planning). Working experience with marketing of a general type of product is necessary to enable a manager to form subjective estimates sufficiently accurate to be useful in maintaining and increasing profitability against competitive marketers. Neither a new M.B.A. in marketing nor the successful top marketing manager of an automobile company could perform well immediately after appointment as the top marketing manager of a cosmetics company. Because the marketing manager's assigned role is so complex, it would be intolerable to repeat the entire reasoning process with each element of each new marketing plan; therefore, companies and marketing managers tend to institutionalize and ritualize the marketing planning process. In a given company, it
becomes standard over the years that certain information in certain amounts will be collected when a certain sort of plan must be prepared. This institutionalization, to the extent it obscures the underlying rationale of the information collecting process, tends to have various unintended effects. Among those companies to which marketing success is crucial, the more successful ones tend to spend higher and higher percentages of the sales dollar on marketing planning. The cost of each of their standard methods of collecting information tends to rise faster than the expected values of the plans based on the information. Among the less successful companies, on the other hand, the costs of marketing planning relative to sales volume tend to fall. At the same time, potentially profitable lower volume opportunities, particularly outside the United States, tend to be neglected because they cannot support the costs of standard institutionalized methods of marketing planning.
If a critical point can be discerned in the slow evolution of retail trade, then its date is the epoch of Elizabeth I and the early Stuarts; its place, London. It is here that we get the first glimpses of consumers feeling a new authority in their purses, a new confidence in the exercise of choice. Hitherto, the scarcities and local shortages and the general inefficiency of everything connected with distribution had resulted, generally speaking, in a seller's market, and the buyer was accustomed to scant respect in the market-place. But now, retailing began to come of age and to take seriously the business of wooing the consumer. Something that we nowadays recognize as shopping had begun . . . . Why at this particular time and in this particular city did the slow process of change suddenly accelerate?.., there was a conjunction of three important circumstances: there were more people, there were more wealthy people, and there were more luxury goods available from abroad. These three profound changes, all happening together, worked a transformation in London's retail trade in a couple of generations. - D o r o t h y Davis, Fairs, Shops, and Supermarkets
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W. DICKERSON HOGUE
Mr. Hogue is a senior lecturer in International Business at Indiana University. A marketing manager faced with even a relatively simple problem possesses no more than a tiny fraction o f the possibly relevant information. Worse, he can never be sure he has enough to formulate the optimum solution the one most profitable in the short, medium, and long run. The amount available approaches infinity, and to collect it wouM require nearly infinite resources. He must decide whether he needs more, bearing in mind that the costs o f getting it shouM be offset by the increased value o f the final plan. The author suggests a formula for helping decide whether additional facts are needed. He also examines such issues as underspending and overspending, underestimating low-volume opportunities, testing low-cost planning, and the need for experience.
Any marketing manager making a marketing decision would like to come up with the optimum solution-the solution most profitable in the short, the medium, and the long term. How closely he will approach such a happy ending will be determined largely by his skill in gathering information related to the problem. At this point, his problem assumes its most formidable aspect: the amount of relevant
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information approaches infinity and to collect all of it would require nearly infmite resources. The manager must, therefore, decide whether or not he should obtain more information. If he believes that he does indeed need more information, he must then decide what kinds to obtain and how much of each kind. His guiding principle in such decisions must be that the costs of more information should be offset by the increased value of the final marketing plan.
THE COMPLEXITY OF THE PROBLEM On any given marketing problem, no marketing manager has enough information to be absolutely certain that his solution is the optimum one. Staggering amounts of information would be required to achieve this goal for even a relatively uncomplicated choice. For example, suppose a marketing manager has as part of a broad marketing plan, the relatively trivial task of choosing the best shade of red for a package design for a product to be sold principally through self-service stores. He will probably collect four kinds of information. First, he will have at hand the results of consumer research on the over-all package
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design and its subordinate elements, including the red portion. Typically, the company researchers would have interviewed 300 housewives, perhaps in Kansas City, choosing the homes or aparIments representative of economically middle-class U.S. urban housing. Unless the product is aimed specifically at men or young single women, these groups would not be interviewed. Working wives would not be represented, nor would the upper and lower economic classes (say, 5 percent and 10 percent respectively of total population) or rural families. Second, the marketing manager will have the opinion of the package designer concerning the choice of tone and intensity of red in his original design and the accuracy of its reproduction on the first printed sample packages. Third, the opinions of the various marketing managers concerned would have been collected. These opinions are probably inferred from the comment or lack of comment on the red colors in the original hand-drawn design and the first samples of printed packages. Last, the marketing manager will need the opinions of the company's ink buyer and the salesman for the ink supplier. These two would have worked together briefly to find an ink that had printing characteristics, scuff resistance, fade resistance, cost, and so on in normal ranges, and that would yield a printed red corresponding to the one in the original package design. This is, of course, quite a lot of information to have about one small detail in a marketing plan. Think, however, of the tremendous amount of information the marketing manager would need before he could approach 100 percent certainty that his choice of red is the optimum choice instead of just a satisfactory one. Every tone and shade of every hue of red would have to be tested at every intensity of color, under every potential lighting condition, in comparison with every other package design that might be put next to it on a dealer's shelf, and in the opinions (weighted according to consumption) of large numbers of people representing potential consumers of both sexes and
all ages, economic and cultural backgrounds, and degrees and types of eyesight! Worse, each possible ink would have to be tested in this way at various package ages (when the ink had faded or otherwise changed) after each ink had been subjected to each possible combination of temperature, humidity, and abrasion in shipping or handling, for example. After all this testing to compare various red inks on the basis of their effects on consumers, there would still be the other side of the cost-benefit equation to examine. What would be the comparative cost of buying and printing each ink? How would each ink affect the quality of the product or packaging? What would be the risks (costs) of nonavailability? What would be interest charges and storage costs on inventory? Would any ink necessitate changes in the planned production process and, if so, what would be the costs? Obviously, a marketing manager faced with even a relatively simple problem possesses no more than a tiny fraction of the possibly relevant information. No marketing manager with profit responsibility, however, would w a n t to collect all the possibly relevant information: "It would cost so much we just couldn't make a dime." Instead, he hopes to have before him what he considers sufficiently accurate information on what he considers the most important aspects of his problem.
MORE INFORMATION NEEDED? A senior marketing manager working on a complex plan, such as one for introduction of a new product, will probably suggest increasing in specific ways the information supporting the recommendations first presented to him. Every marketing man has frequently heard, in marketing discussions, such statements as, "The plan sounds good over-all, but there are one or two aspects where probably we should have more consumer research," or "Fine, but let's ask Joe's people to recheck that one part of the plan we've been discussing, and see if they can't tighten up those estimates."
BUSINESS HORIZONS
What ShouM Market Planning Cost?
On the other hand, a senior marketing manager probably rejects some of his subordinates' suggestions that additional information be obtained, with such explanations as: "No, I d o n ' t think we can ask Jim and his people to put any more time on that question"; "Good point, but we just can't afford to wait for that data before deciding on this"; "I see what you mean, but it doesn't seem worth another $10,000 to check that point further"; or "Well, a perfect plan it isn't, b u t it seems sound enough to me. I think we have all the bases pretty well covered. Let's go on it." How can we describe the way a marketing manager decides whether or not to obtain certain amounts of certain types of additional information? I believe this formula is the tool used, consciously or unconsciously, by the manager: C should be ~< W l - W This is a statement of the obvious truth that the cost of additional information should not exceed the additional value of a plan which is based on the additional as well as the previous information. (Detailed definitions are in the box below.) The estimated value (W or Wl) of a plan is calculated as: W = PxV - ( P I x F ) This formula states that the estimated value
of a plan depends on several subjective estimates-a subjective estimate of probability of success multiplied by a subjective estimate of the value of success, less the total of a subjective estimate of probability of failure multiplied by a subjective estimate of the cost of failure. As an illustration, suppose the marketing vice-president of a food products firm is studying the recommended plan for the introductory marketing of the company's new brand of breakfast cereal. The plan has been presented to him in the format standard in his company. Its 100-plus pages cover the results of hundreds of tests and investigations into various aspects of the p r o b l e m - c o n s u m e r acceptability of the product, production, Finance, purchasing, sales, packaging, advertising, promotion, legal, trademark, patent, and so on, plus forecasts of such items as dealer and consumer purchases, timing, and Financial results. As he reads each item, the marketing vice-president considers, in the light of his experience, its relative importance in the over-all plan. He also considers whether he is satisfied that enough work of the right sort has been done to ensure that the recommendation concerning each item is sufficiently likely (considering its relative importance) to be correct. During his examination he notes several
DEFINITIONS OF FORMULA TERMS USED C = The cost, after taxes, of obtaining additional information. Cost included not only expenditure of money, but also opportunity cost-profits foregone either because manpower was used on this project rather than on other profitable projects or because the delay incurred by additional work on this project meant giving competitors an increased share of the future market. "Should be ~ " = "Should be limited by" or "should be less than or equal to." W (The expected present value of a plan before additional information is collected) = (PxV) - (PI xF) where P = The weighted average of a range of subjectively determined probabilities of "success" of a particular plan based on all the information now available. V = The weighted average of a range of subjectively determined values of "success" of a particular plan based on all the information now available. The values are calculated as expected future earnings, after taxes, discounted to their present values. P1 = 1.0 minus P. F = The weighted average of a range of subjectively determined costs (expected future losses, after taxes, discounted to their present values) of failure of a particular plan based on all the information now available. Wl (The expected present value of the plan after alterations based on the additional information collected) is calculated in the same manner as W. The values of one or more of' P,V,P1, and F are changed because of alterations made in the previous plan.
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items that need more work before the recommendations are well-founded. Also, he has formed somehow-probably partly consciously, but certainly to a large extent subconsciously or intuitively-various estimates concerning the risks and rewards of implementing the plan. A marketing manager may or may not use numbers to express his estimates, but each can be expressed numerically. In this particular case, the marketing vice-president has made several estimates. First, in general, to implement the recommended plan as it stands would have a range of probability of success from at best .95 to at worst .45, with a weighted average probability of success of .75. Knowing his company's circumstances, he defmes success as profitability in each year of established life of the new brand of more than $400,000 before taxes (any brand earning less would not be worth keeping in his company's current line) plus the absence of any important unpleasant effects (such as antitrust or other major legal action, damage to company reputation, or loss of morale among company employees) which would be so costly in money terms that they are unacceptable. Second, in general, success of the recommended plan as it stands now would have a present worth to the company somewhere in a range of $1,200,000 minimum to $10,000,000 maximum, with a weighted average of $4,500,000. He has reached these figures by considering the probable length of life of the brand and its profitability year-by-year at each level of success, and by discounting future profits, after taxes, back to present values. Third, probabilities of failure are the reciprocals of the probabilities of success. At worst, failure is .55 probable, at best it is .05 probable, and the weighted average probability of failure is .25. Fourth, part of the cost of failure can be more objectively estimated (for any particular length of time after the start of implementation before the failure is recognized as such) than the other factors. In fact, the recommendation of the introductory plan probably included a
page of estimates of losses to the company in case of cancellation of the plan at various stages of implementation. Looking at the estimates, which range from a $35,000 loss, after taxes, at the earliest stage of implementation up to a maximum $4,000,000 loss, after taxes, at peak investment, the marketing vice-president uses a $2,500,000 loss as the subjectively determined weighted average cost of failure. Putting these figures into the right-hand side of our equation, the expected present value to the company of implementing the plan as it now stands is, in the opinion of the marketing vice-president: (.75 x $4,500,000 - (.25 x $2,500,000) or $3,375,000 - $625,000 or $2,750,000. It seems a worthwhile plan. The marketing vice-president is, however, concerned at this point whether the plan's value to the company might be increased at reasonable cost. In recent years, about 80 percent of all new products introduced by his company in test markets have been expanded to additional markets within twelve months without major changes in the original plan. By estimating only .75 probability of success for the plan now before him, he is saying the plan has a below average probability of success. Therefore, despite the estimated $2,750,000 value he has assigned the plan, he is dissatisfied and is anxious to increase its value. He considers, therefore whether additional information could be obtained at reasonable cost, which would form a basis for altering the plan so that one or more of the following might be achieved: An increase in the weighted average probability of success. Each .01 increase, with the values of success and failure remaining as now, would be worth $70,000. An increase in the weighted average value of success. Each $100,000 increase, with the other factors remaining as now, would be worth $75,000. A decrease in the weighted average cost of failure. Each $100,000 decrease, with the other factors remaining as now, would be worth $25,000. A reduction in the company's risks. Probabilities of success of the plan as it stands seem
BUSINESS HORIZONS
What ShouM Market Planning Cost?
to range around a weighted average of .75, from .95 down to .45. At the lower end, the present plan is worth only $650,000, that is (.45 x $4,500,000)-(.55 x $2,500,000). Can he get, at reasonable cost, additional information which might or might not form a basis for altering the plan, but which would shrink the lower end of the estimate of the range of probability of success? Even if weighted average probability were to remain the same at .75, the company's risks would be sharply reduced if the range of probability ran from .95 down only to, say, .60 instead of the original .45. With these concerns in mind, the marketing vice-president turns to the notes he made of what seemed weak points in the recommended plan. A few of these are parts of the plan where he feels the information is sufficient but that the wrong conclusions-or, at best, shaky conclusions-have been reached. Weak points of this type are normally corrected without much difficulty by discussion among the company's marketing managers concerned with the plan. Most of the weak points, however, are of another type. They are parts of the plan where insufficient information has been collected, considering the importance of the parts to the success of the total plan and considering the probable cost of additional information. They are parts of the plan where the conclusions seem right, based on the information available, but where the amounts or types of available information do not seem sufficient to form the basis for satisfactorily firm conclusions. To correct this type of weak point to the marketing vice-president's satisfaction, certain subjectively determined amounts of certain subjectively determined types of additional information must be collected and conclusions redrawn based on the new total available information. Collecting the new information will cost roughly foreseeable amounts of time and money. After additional information is obtained, the marketing vice-president may decide he needs still further information to come to satisfactorily firm conclusions. The information collecting process stops, in fact, only when the marketing vice-president (and also, perhaps, his superiors in the company) feels the costs of
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additional information would not be at least equalled by a resulting increase in the expected value of implementation of the total plan.
THE NEXT STEPS The thought process described is central to marketing planning (and a number of other types of planning). The nature of its structure has led to several observable results.
The "Standard" Procedure The process is so complex that it would be intolerable for each marketing man to go through it for each item he considers in working on a solution to a marketing problem. However, the process is a vital one. Most companies and marketing managers seem to resolve this dilemma by adopting "standard" methods of collecting information as bases for attacking marketing problems that are frequently encountered. That is, the thinking process is institutionalized by establishing a number of standard procedures for collecting information and planning. In a large, longestablished company there is almost always a rigidly specified "company way" to approach each type of marketing problem which comes up frequently.
Underspending and Overspending Companies in competitive industries where marketing skill is crucially important may not be spending correct amounts of time and money on information collection. The most successful companies, particularly if long established, are in danger of overspending, while the less successful ones tend to underspend. Naturally, a successful, long-established company tries to repeat processes that led to past successes and avoid processes that led to past failures. As a result, its current marketing
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plans are based on similar amounts of information of the same types used previously plus information in types and amounts that, in hindsight, would have enabled the company to avoid recent past failures. The result is a kind of ratchet action, which tends to increase the amount of information collected for a given kind of plan in a successful company, as safeguards against recurrence of the latest failures are added to the standard information. Institutionalized standard plans tend to become ever more costly. Company finances do not limit this ratchet action, since a successful company can support increased planning costs. The marketing managers themselves are not inclined to limit the ratchet action; their personal success depends heavily on the success of their marketing plans, and any additional relevant information-no matter how much of the company's money it costs-may help them avoid a failure. The owners of the company and the nonmarketing managers do not limit the ever-increasing cost of marketing planning; the company's success depends on marketing, the company has been successful to a certain extent, and who can quarrel with success? It is doubtful, then, whether a successful marketing company is as suspicious as it should be of the real justification for spending time and money on collecting so much information. On the other hand, surviving but less successful companies that depend on marketing skill are apt to view with skepticism the high costs of detailed marketing planning. In many companies producing branded items that sell mainly through supermarkets in the United States, it is standard in the marketing planning for, say, the introduction of a new brand, to spend a minimum of two years and hundreds of thousands of dollars in information collection. In many cases, information collection and planning has taken four or five years and has cost millions. A company hard-pressed for profit growth and doubting (because of its recent ratio of marketing successes to failures) that its marketing managers are highly skilled tends to question sharply whether it is justifiable to spend additional time and money to
collect more information for a particular plan. Since the only possible justification is the top marketing manager's opinion and an objective defense is hard to fred, there is an excellent chance the company will spend less then he feels it really should.
Underestimating Low-Volume Opportunities The marketing managers of the large U.S. operations of a successful long-established company naturally tend to underestimate the probabilities of success of marketing planning less expensive than is standard in their company's experience. This frequently leads them to neglect relatively small volume opportunities in and, especially, outside the United States. Their feeling concerning these individually small opportunities is that the volume would not be large enough to support the costs of the marketing planning and top management time necessary to handle the business properly. This feeling may or may not be justified. Especially outside the United States competitors for lower volume markets are likely to have less money to spend on marketing planning and to be less skillful in marketing then competitors for high volume U.S. markets. Where this is true, a marketing planning procedure less expensive and less skillful than that used in the United States may have a high probability of winning a profitable share of the market.
A Test of Low-Cost Planning I had an unusual opportunity to test this proposition in handling a large U.S. company's operations in more than a hundred foreign markets over a period of twelve years. The average number of brands sold in each market was about five, so there were over 500 individual marketing situations observable in each of many years. Unit salesin these situations ranged from about 300 to over 300,000 per year. Assuming 75 cents per average unit sold was available to handle all aspects of marketing management (including travel, reporting to
BUSINESS HORIZONS
What ShouM Market Planning Cost?
headquarters, and so on in addition to information collecting and planning), annual amounts of money available for marketing management in each of the individual marketing situations ranged from $300 to $250,000. Thus, the types and numbers of marketing problems were more or less similar in each situation, but widely different amounts of money were available to solve them. In these circumstances, the key to profitability of the over-all operation was to make marketing decisions that were correct a profitable percentage of the time while holding the costs of information collecting and marketing planning within the money available in each situation. What developed was that given (1) the availability of marketing managers with substantial experience and motivation but only average skill and (2) that a brand had about the same market share in one market as in another, costs of marketing management of a brand in a market could be kept in ratio to its sales volume. At the same time, the percentage of success of marketing plans was similar to that for the same brand in other markets. Most of the time, one could expect that spending $500 on information and planning to solve a marketing problem of type A (say, planning a consumer promotion) on Brand X in a market with 10,000 units of annual sale volume would have roughly the same probability of success as spending $5,000 on planning to solve a type A problem for Brand X in a market with 100,000 units of annual sales volume. The relationship was, of course, not absolutely linear across the whole range of sales volumes. To have the same percentage of success, it seemed necessary to spend about 20-25 percent more per unit on planning in the smallest marketing situations than in the average. A minimum of mechanical action-f'fling, writing a letter, and the like-with a certain fixed cost is involved in every marketing plan of a certain type, no matter what the cost of planning has been. Similarly, to ensure that failures are recognized promptly there must be a minimum fLxed cost of reporting incurred in even the smallest marketing situations. On reflection, this nearly fixed relationship
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of cost of marketing planning to sales volume, at a certain percentage level of marketing success, seems reasonable because it indicates that the percentage of success is determined more by the level of marketing competition than by an absolute standard of amounts and kinds of information. In addition, competitors in a certain market faced similar constraints on their costs of marketing planning.
Improving Planning Efficiency One deduction from these observations is that the most profitable way to increase marketing success versus competitors is not to spend additional amounts per unit on marketing management but to try to improve the efficiency with which the given amount is spent. (Admittedly, the 75 cents per unit is an arbitrary figure that seems workable for the brands I handled but is quite possibly too high or low.) If relevant existing information (say, previous results of varying types of promotion in various types of market) is made readily available to marketing managers, they should be able to increase their percentages of success at no increase in planning cost. Also, if marketing managers are encouraged to think in terms of cost of information and probabilities of success and expected values of success, rather than in terms of absolute standards, they should be able to increase their percentages of success with little or no increase in planning cost. An example is consumer research. Suppose a marketing manager feels a certain type of consumer research is. not valid by some arbitrary standard of validity, unless X number of consumer interviews are made by researchers trained to quality level Y and using a questionnaire prepared by specialists trained to quality level Z. If any other research is "not valid," then the marketing manager has no way of estimating consumer reactions to a product change in one of the small, less developed nations where there are no professionals in consumer research and a brand's total annual budget for all marketing management is less
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than would be the cost of one "valid" survey. Instead, the marketing manager should think of his company's U.S. standard of research not as the only valid way but as a method intended to produce over-all results accurate within three percentage points 95 percent of the time in the United States. Then he may be led to find some inexpensive way of testing consumer reaction in the less developed country. He might use a smart local salesman, completely untrained in research, as his researcher to ask one or two simple questions of twenty or thirty women at each of four or five open-air markets in the capital city. Total time required, perhaps two days. Total cost, including tabulation, perhaps $25-30. As long as the marketing manager takes care not to equate such loosely designed and loosely controlled research with his company's standard research in the United States, it may be very useful to him. As long as he is careful to view the results not as being "valid" but as having, say, 75-80 percent probability of being correct within four or five percentage points for women of a certain class (open-air market buyers) in that city, he may well have some extremely useful information.
The Need for Experience No matter how intelligent and well-educated a newly-hired marketing man may be, he will need considerable working experience before he can do an acceptable job as the top marketing manager of a company in a competitive industry where marketing skill has substantial influence on a company's results. Subjective estimates are essential at several points in the process of making marketing decisions, and experience is the only raw material on which these estimates can be based. Further, because distribution channels, consumers, media, and many other important elements in the marketing process may differ widely from one product type to another, successful experience as a top marketing manager for one product type does not assure immediate success as a top marketing manager
for another. A marketing manager with a highly successful experience in women's shoes would probably flounder initially as a marketing manager for children's toys or frozen orange juice. His successful previous experience should enable him to organize his thinking about a new product type much more quickly and effectively than a man with no marketing experience. Still, it will take considerable time before he feels comfortable about his estimates in his new field.
lmlt J l ,he ost of oUta o aaa t on.
Ih II information on which to base a marketing decision should be limited by how much it is expected to increase the value of the decision. The amount of information possibly relevant to any particular marketing problem at a particular time approaches infinity; to collect all of it is unfeasible. In addition, it is impossible to foresee the circumstances in which any particular marketing decisiort will be implemented. Many will closely resemble previous and current circumstances, but many will be different. Many of the future circumstances will exert the same relative influences on the success of a marketing project as before, but many will not. The marketing manager's role in his company, in considering any marketing project, is to weigh the costs of obtaining various types and amounts of additional information against a combination of: Subjective estimates of which future circumstances will influence the success of the project and what the degree of influence will be Subjective estimates of the degree of certainty as to the exact nature of at least the most important future circumstances Subjective estimates of the likelihood of each of various degrees of success of the project and how much money each of the degrees would be worth to the company Subjective estimates of the likelihood of various degrees of failure of the project Subjective estimates of the likelihood that failure of the project will be recognized at each stage of implementation (these estimates are to be combined with more-or-less objective estimates of the cost of failure at each of the stages of implementation).
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What ShouM Market Planning Cost?
The marketing manager then creates a marketing plan of optimal value (calculated as being the maximum of expected value of implementation less the cost of informationcollection and planning). Working experience with marketing of a general type of product is necessary to enable a manager to form subjective estimates sufficiently accurate to be useful in maintaining and increasing profitability against competitive marketers. Neither a new M.B.A. in marketing nor the successful top marketing manager of an automobile company could perform well immediately after appointment as the top marketing manager of a cosmetics company. Because the marketing manager's assigned role is so complex, it would be intolerable to repeat the entire reasoning process with each element of each new marketing plan; therefore, companies and marketing managers tend to institutionalize and ritualize the marketing planning process. In a given company, it
becomes standard over the years that certain information in certain amounts will be collected when a certain sort of plan must be prepared. This institutionalization, to the extent it obscures the underlying rationale of the information collecting process, tends to have various unintended effects. Among those companies to which marketing success is crucial, the more successful ones tend to spend higher and higher percentages of the sales dollar on marketing planning. The cost of each of their standard methods of collecting information tends to rise faster than the expected values of the plans based on the information. Among the less successful companies, on the other hand, the costs of marketing planning relative to sales volume tend to fall. At the same time, potentially profitable lower volume opportunities, particularly outside the United States, tend to be neglected because they cannot support the costs of standard institutionalized methods of marketing planning.
If a critical point can be discerned in the slow evolution of retail trade, then its date is the epoch of Elizabeth I and the early Stuarts; its place, London. It is here that we get the first glimpses of consumers feeling a new authority in their purses, a new confidence in the exercise of choice. Hitherto, the scarcities and local shortages and the general inefficiency of everything connected with distribution had resulted, generally speaking, in a seller's market, and the buyer was accustomed to scant respect in the market-place. But now, retailing began to come of age and to take seriously the business of wooing the consumer. Something that we nowadays recognize as shopping had begun . . . . Why at this particular time and in this particular city did the slow process of change suddenly accelerate?.., there was a conjunction of three important circumstances: there were more people, there were more wealthy people, and there were more luxury goods available from abroad. These three profound changes, all happening together, worked a transformation in London's retail trade in a couple of generations. - D o r o t h y Davis, Fairs, Shops, and Supermarkets
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