Solution Manual for Market-Based Management, 6th Edition
Solution Manual for Market-Based Management, 6th Edition helps you tackle difficult exercises with expert guidance.
Madison Taylor
Contributor
5.0
171
about 2 months ago
Preview (31 of 180)
Sign in to access the full document!
Market-Based Management
Sixth Edition – i –
Instructor’s Manual – Chapter 16
Market-Based Management
Strategies for Growing Customer Value and Profitability
Sixth Edition
Instructor’s Manual
Overview
Book Objectives and Teaching Intent
Market-Based Management: Strategies for Growing Customer Value and Profitability has three primary
objectives:
First, the book maintains a focus on customer value and profitability throughout. It is my hope that students
using this book will develop a good understanding of customer value and the ways that market strategies
contribute to profitability and growth.
The second objective is that the book expand students’ understanding of important marketing concepts and
tools by means of meaningful examples and applications. With this approach, instructors can use the book
as support for lectures, case studies, marketing simulations, and class projects.
The third objective is that the book be comprehensive, yet short enough (16 chapters) to allow for the use of
marketing case studies, marketing simulations, and marketing projects. In this manner the book is intended
to support discussions and applied assignments.
Chapter Support Materials
Each chapter in the Instructor’s Manual includes:
An introductory application to facilitate chapter discussion;
Three key teaching objectives;
Recommended Harvard Business School Case Studies related to the chapter’s content;
Answers to the Market-Based Strategic Thinking questions near the end of the book’s chapters; and
Screen printouts of the online interactive marketing performance tools described at the end of each chapter
of the book, along with discussion and the answers to the questions posed in the book.
PowerPoint slides for the chapters are available upon request.
Marketing Performance Tools
Marketing education without application is a missed learning opportunity.
One of the distinguishing features of Market-Based Management is its performance orientation. How-to-use
marketing concepts and mechanisms are a continuing theme throughout the book, and each chapter’s
marketing performance tools help students to solidify their learning with application exercises based on the
chapter’s content. For many of the marketing performance tools, the Instructor’s Manual has suggestions for
creating additional assignments or extending the analysis of the data provided for the examples used.
The marketing performance tools are part of an interactive Web site where students can create their own user
accounts. After applying the marketing performance tools, students can save the results. They can also
experiment with the tools by entering their own data, and the can save those results also.
To access the marketing performance tools, go to RogerJBest.com. The tools listed on the next page are
described in the book, appear on the Web site, an are illustrated and discussed in the Instructor’s Manual.
Sixth Edition – i –
Instructor’s Manual – Chapter 16
Market-Based Management
Strategies for Growing Customer Value and Profitability
Sixth Edition
Instructor’s Manual
Overview
Book Objectives and Teaching Intent
Market-Based Management: Strategies for Growing Customer Value and Profitability has three primary
objectives:
First, the book maintains a focus on customer value and profitability throughout. It is my hope that students
using this book will develop a good understanding of customer value and the ways that market strategies
contribute to profitability and growth.
The second objective is that the book expand students’ understanding of important marketing concepts and
tools by means of meaningful examples and applications. With this approach, instructors can use the book
as support for lectures, case studies, marketing simulations, and class projects.
The third objective is that the book be comprehensive, yet short enough (16 chapters) to allow for the use of
marketing case studies, marketing simulations, and marketing projects. In this manner the book is intended
to support discussions and applied assignments.
Chapter Support Materials
Each chapter in the Instructor’s Manual includes:
An introductory application to facilitate chapter discussion;
Three key teaching objectives;
Recommended Harvard Business School Case Studies related to the chapter’s content;
Answers to the Market-Based Strategic Thinking questions near the end of the book’s chapters; and
Screen printouts of the online interactive marketing performance tools described at the end of each chapter
of the book, along with discussion and the answers to the questions posed in the book.
PowerPoint slides for the chapters are available upon request.
Marketing Performance Tools
Marketing education without application is a missed learning opportunity.
One of the distinguishing features of Market-Based Management is its performance orientation. How-to-use
marketing concepts and mechanisms are a continuing theme throughout the book, and each chapter’s
marketing performance tools help students to solidify their learning with application exercises based on the
chapter’s content. For many of the marketing performance tools, the Instructor’s Manual has suggestions for
creating additional assignments or extending the analysis of the data provided for the examples used.
The marketing performance tools are part of an interactive Web site where students can create their own user
accounts. After applying the marketing performance tools, students can save the results. They can also
experiment with the tools by entering their own data, and the can save those results also.
To access the marketing performance tools, go to RogerJBest.com. The tools listed on the next page are
described in the book, appear on the Web site, an are illustrated and discussed in the Instructor’s Manual.
Market-Based Management
Sixth Edition – i –
Instructor’s Manual – Chapter 16
Market-Based Management
Strategies for Growing Customer Value and Profitability
Sixth Edition
Instructor’s Manual
Overview
Book Objectives and Teaching Intent
Market-Based Management: Strategies for Growing Customer Value and Profitability has three primary
objectives:
First, the book maintains a focus on customer value and profitability throughout. It is my hope that students
using this book will develop a good understanding of customer value and the ways that market strategies
contribute to profitability and growth.
The second objective is that the book expand students’ understanding of important marketing concepts and
tools by means of meaningful examples and applications. With this approach, instructors can use the book
as support for lectures, case studies, marketing simulations, and class projects.
The third objective is that the book be comprehensive, yet short enough (16 chapters) to allow for the use of
marketing case studies, marketing simulations, and marketing projects. In this manner the book is intended
to support discussions and applied assignments.
Chapter Support Materials
Each chapter in the Instructor’s Manual includes:
An introductory application to facilitate chapter discussion;
Three key teaching objectives;
Recommended Harvard Business School Case Studies related to the chapter’s content;
Answers to the Market-Based Strategic Thinking questions near the end of the book’s chapters; and
Screen printouts of the online interactive marketing performance tools described at the end of each chapter
of the book, along with discussion and the answers to the questions posed in the book.
PowerPoint slides for the chapters are available upon request.
Marketing Performance Tools
Marketing education without application is a missed learning opportunity.
One of the distinguishing features of Market-Based Management is its performance orientation. How-to-use
marketing concepts and mechanisms are a continuing theme throughout the book, and each chapter’s
marketing performance tools help students to solidify their learning with application exercises based on the
chapter’s content. For many of the marketing performance tools, the Instructor’s Manual has suggestions for
creating additional assignments or extending the analysis of the data provided for the examples used.
The marketing performance tools are part of an interactive Web site where students can create their own user
accounts. After applying the marketing performance tools, students can save the results. They can also
experiment with the tools by entering their own data, and the can save those results also.
To access the marketing performance tools, go to RogerJBest.com. The tools listed on the next page are
described in the book, appear on the Web site, an are illustrated and discussed in the Instructor’s Manual.
Sixth Edition – i –
Instructor’s Manual – Chapter 16
Market-Based Management
Strategies for Growing Customer Value and Profitability
Sixth Edition
Instructor’s Manual
Overview
Book Objectives and Teaching Intent
Market-Based Management: Strategies for Growing Customer Value and Profitability has three primary
objectives:
First, the book maintains a focus on customer value and profitability throughout. It is my hope that students
using this book will develop a good understanding of customer value and the ways that market strategies
contribute to profitability and growth.
The second objective is that the book expand students’ understanding of important marketing concepts and
tools by means of meaningful examples and applications. With this approach, instructors can use the book
as support for lectures, case studies, marketing simulations, and class projects.
The third objective is that the book be comprehensive, yet short enough (16 chapters) to allow for the use of
marketing case studies, marketing simulations, and marketing projects. In this manner the book is intended
to support discussions and applied assignments.
Chapter Support Materials
Each chapter in the Instructor’s Manual includes:
An introductory application to facilitate chapter discussion;
Three key teaching objectives;
Recommended Harvard Business School Case Studies related to the chapter’s content;
Answers to the Market-Based Strategic Thinking questions near the end of the book’s chapters; and
Screen printouts of the online interactive marketing performance tools described at the end of each chapter
of the book, along with discussion and the answers to the questions posed in the book.
PowerPoint slides for the chapters are available upon request.
Marketing Performance Tools
Marketing education without application is a missed learning opportunity.
One of the distinguishing features of Market-Based Management is its performance orientation. How-to-use
marketing concepts and mechanisms are a continuing theme throughout the book, and each chapter’s
marketing performance tools help students to solidify their learning with application exercises based on the
chapter’s content. For many of the marketing performance tools, the Instructor’s Manual has suggestions for
creating additional assignments or extending the analysis of the data provided for the examples used.
The marketing performance tools are part of an interactive Web site where students can create their own user
accounts. After applying the marketing performance tools, students can save the results. They can also
experiment with the tools by entering their own data, and the can save those results also.
To access the marketing performance tools, go to RogerJBest.com. The tools listed on the next page are
described in the book, appear on the Web site, an are illustrated and discussed in the Instructor’s Manual.
Market-Based Management
Sixth Edition – ii –
Instructor’s Manual – Chapter 16
Marketing Performance Tools
Chapter 1
1.1 Customer Satisfaction and Profitability
1.2 Customer Retention
1.3 Customer Lifetime Value
1.4 Customer Loyalty and Profitability
Chapter 2
2.1 Company-Level Net Marketing Contribution
2.2 Market-Level NMC, Marketing ROS, and
Marketing ROI
2.3 Company Net Marketing Contribution
and Marketing ROI
2.4 Benchmarking Marketing ROI versus
Operating Income as a Percentage of Sales
Chapter 3
3.1 Market Potential and Market
3.2 Development Index
3.3 Market Share Management
3.4 Product Life-Cycle Sales and Gross Profit
3.5 Sales Forecasting
Chapter 4
4.1 Economic Value Analysis
4.2 Price-Performance Value Mapping
4.3 Customer Value Analysis
4.4 Price-Performance Trade-Offs and
Customer Value
Chapter 5
5.1 Needs-Based Segmentation
5.2 Segmentation Identification
5.3 Segment Profitability
5.4 The “Acid Test” for Segment Strategies
5.5 Customer Relationship Marketing
Chapter 6
6.1 Cost Advantage
6.2 Differentiation Advantage
6.3 Marketing Advantage
6.4 Industry Analysis
Chapter 7
7.1 Product Positioning
7.2 Brand Name Development
7.3 Brand Equity
Chapter 8
8.1 Value-in-Use Pricing
8.2 Perceived-Value Pricing
8.3 Performance-Based Value Pricing
8.4 Price-Volume Pricing
Chapter 9
9.1 Channel Mapping and Pocket Price
9.2 Marketing Channel Profitability
9.3 Alternative Channel Profitability
Chapter 10
10.1 Marketing Communications and Customer
Response
10.2 Estimating Advertising Elasticity
10.3 Estimating the Advertising Carryover Effect
Chapter 11
11.1 Product Life-Cycle Portfolio
11.2 Market Growth Rate–Share Development
Portfolio
11.3 GE/McKinsey Portfolio
Chapter 12
12.1 Offensive Strategies – Core Strategy I:
Grow in Existing Markets
12.2 Offensive Strategies – Core Strategy II:
Improve Margins
12.3 Offensive Strategies – Core Strategy III:
Diversified Growth
Chapter 13
13.1 Defensive Strategies – Core Strategy I:
Protect Position
13.2 Defensive Strategies – Core Strategy II:
Optimize Position
13.3 Defensive Strategies – Core Strategy III:
Monetize, Harvest, or Divest
Chapter 14
14.1 Market Demand and Market Share
14.2 Customer Revenue and Percent Margin
14.3 Marketing and Sales Expenses
Chapter 15
15.1 Variance Analysis – Market Demand and
Market Share
15.2 Variance Analysis – Revenue and Cost
per Customer
15.3 Variance Analysis – Marketing and Sales
Expenses
Chapter 16
16.1 Market Demand and Market Share
16.2 Percent Margin and Marketing Expenses
16.2 Asset Management and Invested Capital
Sixth Edition – ii –
Instructor’s Manual – Chapter 16
Marketing Performance Tools
Chapter 1
1.1 Customer Satisfaction and Profitability
1.2 Customer Retention
1.3 Customer Lifetime Value
1.4 Customer Loyalty and Profitability
Chapter 2
2.1 Company-Level Net Marketing Contribution
2.2 Market-Level NMC, Marketing ROS, and
Marketing ROI
2.3 Company Net Marketing Contribution
and Marketing ROI
2.4 Benchmarking Marketing ROI versus
Operating Income as a Percentage of Sales
Chapter 3
3.1 Market Potential and Market
3.2 Development Index
3.3 Market Share Management
3.4 Product Life-Cycle Sales and Gross Profit
3.5 Sales Forecasting
Chapter 4
4.1 Economic Value Analysis
4.2 Price-Performance Value Mapping
4.3 Customer Value Analysis
4.4 Price-Performance Trade-Offs and
Customer Value
Chapter 5
5.1 Needs-Based Segmentation
5.2 Segmentation Identification
5.3 Segment Profitability
5.4 The “Acid Test” for Segment Strategies
5.5 Customer Relationship Marketing
Chapter 6
6.1 Cost Advantage
6.2 Differentiation Advantage
6.3 Marketing Advantage
6.4 Industry Analysis
Chapter 7
7.1 Product Positioning
7.2 Brand Name Development
7.3 Brand Equity
Chapter 8
8.1 Value-in-Use Pricing
8.2 Perceived-Value Pricing
8.3 Performance-Based Value Pricing
8.4 Price-Volume Pricing
Chapter 9
9.1 Channel Mapping and Pocket Price
9.2 Marketing Channel Profitability
9.3 Alternative Channel Profitability
Chapter 10
10.1 Marketing Communications and Customer
Response
10.2 Estimating Advertising Elasticity
10.3 Estimating the Advertising Carryover Effect
Chapter 11
11.1 Product Life-Cycle Portfolio
11.2 Market Growth Rate–Share Development
Portfolio
11.3 GE/McKinsey Portfolio
Chapter 12
12.1 Offensive Strategies – Core Strategy I:
Grow in Existing Markets
12.2 Offensive Strategies – Core Strategy II:
Improve Margins
12.3 Offensive Strategies – Core Strategy III:
Diversified Growth
Chapter 13
13.1 Defensive Strategies – Core Strategy I:
Protect Position
13.2 Defensive Strategies – Core Strategy II:
Optimize Position
13.3 Defensive Strategies – Core Strategy III:
Monetize, Harvest, or Divest
Chapter 14
14.1 Market Demand and Market Share
14.2 Customer Revenue and Percent Margin
14.3 Marketing and Sales Expenses
Chapter 15
15.1 Variance Analysis – Market Demand and
Market Share
15.2 Variance Analysis – Revenue and Cost
per Customer
15.3 Variance Analysis – Marketing and Sales
Expenses
Chapter 16
16.1 Market Demand and Market Share
16.2 Percent Margin and Marketing Expenses
16.2 Asset Management and Invested Capital
Loading page 4...
Market-Based Management
Sixth Edition – iii –
Instructor’s Manual – Chapter 16
Course Application and Design
The information that follows can be of help to instructors in deciding when and how to use Market-Based
Management. A set of guidelines for using the book is presented for each of the following courses:
Undergraduate Marketing Strategy Course;
First-Year MBA Market-Based Management Course;
MBA Capstone Marketing Strategy Course;
Executive MBA Market-Based Management Course; and
MBA Marketing Strategy Course – With a Focus on Building a Marketing Plan.
Any of these courses could be built around the process of building a strategic market plan.
Undergraduate Market Strategy Course
Objective To present a comprehensive application of marketing concepts and tools
within the framework of developing a strategic market plan and marketing
mix strategy.
Approach Marketing case studies or marketing simulations, or both, serve as the
means for applying the marketing concepts and tools used in developing
a strategic market plan.
Book For a course built around case studies (see specific chapters in the
Instructor’s Manual for recommended case studies) or a marketing
simulation, the book may be used in the following way:
Chapters 1 and 2 lay the foundation for market orientation, customer satisfaction, marketing performance
metrics, and marketing profitability. Students need to master the connection between customer satisfaction
and profitability, and understand the mechanics of marketing profitability (net marketing contribution).
Chapters 3 to 6 focus on market analyses and the input needed for developing a market strategy.
Chapters 7 to 10 discuss marketing mix strategies. These chapters cover the concepts and tools needed to
build strategies for product positioning, pricing, marketing channels, and marketing communications.
Chapters 11 to 16 are likely to include new material for undergraduates. As a result, more time might be
spent talking about the strategic nature of marketing (Chapters 11-13), building and implementing a
marketing plan (Chapters 14-15), and the impact market-based management has on the financial
performance of a business (Chapter 16).
First-Year MBM Market-Based Management Course
Objective For most new MBAs, this will be their first marketing course. The
objective should be to cover the marketing fundamentals and present a
comprehensive view of the impact marketing strategies have on
marketing performance and business profitability.
Approach Many MBA marketing instructors prefer to use marketing case studies in
this course. The instructor’s approach could include a case book, along
with Market-Based Management, or using the marketing case studies
recommended in the Instructor’s Manual for each chapter.
Book For those preferring a heavy case approach with minimum lecture, the
book should be used for outside reading to help students understand key
marketing concepts and tools. For those using a combination of lecture
and case studies, I recommend more time be spent in class discussing
the concepts presented in each of the book’s chapters. In either case, I
believe the first ten chapters are the most important for this course in
delivering the following benefits:
Sixth Edition – iii –
Instructor’s Manual – Chapter 16
Course Application and Design
The information that follows can be of help to instructors in deciding when and how to use Market-Based
Management. A set of guidelines for using the book is presented for each of the following courses:
Undergraduate Marketing Strategy Course;
First-Year MBA Market-Based Management Course;
MBA Capstone Marketing Strategy Course;
Executive MBA Market-Based Management Course; and
MBA Marketing Strategy Course – With a Focus on Building a Marketing Plan.
Any of these courses could be built around the process of building a strategic market plan.
Undergraduate Market Strategy Course
Objective To present a comprehensive application of marketing concepts and tools
within the framework of developing a strategic market plan and marketing
mix strategy.
Approach Marketing case studies or marketing simulations, or both, serve as the
means for applying the marketing concepts and tools used in developing
a strategic market plan.
Book For a course built around case studies (see specific chapters in the
Instructor’s Manual for recommended case studies) or a marketing
simulation, the book may be used in the following way:
Chapters 1 and 2 lay the foundation for market orientation, customer satisfaction, marketing performance
metrics, and marketing profitability. Students need to master the connection between customer satisfaction
and profitability, and understand the mechanics of marketing profitability (net marketing contribution).
Chapters 3 to 6 focus on market analyses and the input needed for developing a market strategy.
Chapters 7 to 10 discuss marketing mix strategies. These chapters cover the concepts and tools needed to
build strategies for product positioning, pricing, marketing channels, and marketing communications.
Chapters 11 to 16 are likely to include new material for undergraduates. As a result, more time might be
spent talking about the strategic nature of marketing (Chapters 11-13), building and implementing a
marketing plan (Chapters 14-15), and the impact market-based management has on the financial
performance of a business (Chapter 16).
First-Year MBM Market-Based Management Course
Objective For most new MBAs, this will be their first marketing course. The
objective should be to cover the marketing fundamentals and present a
comprehensive view of the impact marketing strategies have on
marketing performance and business profitability.
Approach Many MBA marketing instructors prefer to use marketing case studies in
this course. The instructor’s approach could include a case book, along
with Market-Based Management, or using the marketing case studies
recommended in the Instructor’s Manual for each chapter.
Book For those preferring a heavy case approach with minimum lecture, the
book should be used for outside reading to help students understand key
marketing concepts and tools. For those using a combination of lecture
and case studies, I recommend more time be spent in class discussing
the concepts presented in each of the book’s chapters. In either case, I
believe the first ten chapters are the most important for this course in
delivering the following benefits:
Loading page 5...
Market-Based Management
Sixth Edition – iv –
Instructor’s Manual – Chapter 16
Chapters 1 and 2 provide a sound basis for marketing and the importance of market orientation, customer
satisfaction, marketing performance metrics, and marketing profitability.
Chapters 3 to 6 focus on market analyses and the input needed to develop a market strategy.
Chapters 7 to 10 discuss the marketing mix strategy. These chapters provide the basic marketing concepts
and tools needed to build a strategy with product positioning, pricing, marketing channels, and marketing
communications.
Instructors at schools on the quarter system may want to limit coverage to Chapters 1 to 10 as outlined
above (about one chapter per week). At schools on the semester system (14 to 16 weeks), instructors may
want to continue with strategic marketing (Chapters 11 to 13).
Chapter 14 (building a marketing plan) and Chapter 15 (implementing a marketing plan) may be beyond the
scope of an introductory MBA marketing course
Depending on the instructor’s preferences and orientation, Chapter 16 could be used to illustrate the ways
that the various marketing concepts and tools presented in the book can impact both marketing performance
(such market share, market growth, and sales) and financial performance (such as net income, return on
capital, and earnings per share).
MBA Capstone Market Strategy Course
Approach A heavy use of marketing case studies and a marketing simulation is
common. This course, besides its focus on applying students’ marketing
knowledge acquired in previous courses, introduces more advanced
concepts and serves to integrate market strategies and performance with
the overall success of a business.
Objective Present and apply advanced marketing concepts and tools. This is
generally a second-year MBA or MBA capstone marketing course, which
focuses on applying marketing knowledge in the development of market
strategies.
Book The book plays a supporting role in Chapters 1 to 10 and, depending on
previous marketing courses, would be used to present new content in
Chapters 11 to 16.
Chapters 3 to 6 (market analysis) and Chapters 7 to 10 (tactical marketing strategies) could be assigned as
needed to support specific marketing cases and lectures.
Even if covered in a previous course, I strongly believe the concepts and core messages presented in
Chapters 1 and 2 need to be reinforced. Of particular importance is the impact of market orientation and
customer satisfaction levels on profitability (Chapter 1), as well as the marketing metrics in both chapters
and the mechanics of the net marketing contribution in Chapter 2.
Chapters 11, 12, and 13 (portfolio analysis and offensive and defensive strategic marketing plans) deserve
extensive attention and class discussion in this course.
Chapter 14 (developing a marketing plan) and Chapter 15 (implementing a marketing plan) are also
important topics for this course. In many instances, they may be coordinated with a marketing simulation or
major case study in building a marketing plan.
Chapter 16 is included in the book specifically for this course. It goes beyond the impact of marketing
strategies on sales, market share, and the net marketing contribution to show how market strategies also
affect net profit, assets, return on assets and, ultimately, shareholder value. The chapter integrates
marketing with accounting and finance.
Sixth Edition – iv –
Instructor’s Manual – Chapter 16
Chapters 1 and 2 provide a sound basis for marketing and the importance of market orientation, customer
satisfaction, marketing performance metrics, and marketing profitability.
Chapters 3 to 6 focus on market analyses and the input needed to develop a market strategy.
Chapters 7 to 10 discuss the marketing mix strategy. These chapters provide the basic marketing concepts
and tools needed to build a strategy with product positioning, pricing, marketing channels, and marketing
communications.
Instructors at schools on the quarter system may want to limit coverage to Chapters 1 to 10 as outlined
above (about one chapter per week). At schools on the semester system (14 to 16 weeks), instructors may
want to continue with strategic marketing (Chapters 11 to 13).
Chapter 14 (building a marketing plan) and Chapter 15 (implementing a marketing plan) may be beyond the
scope of an introductory MBA marketing course
Depending on the instructor’s preferences and orientation, Chapter 16 could be used to illustrate the ways
that the various marketing concepts and tools presented in the book can impact both marketing performance
(such market share, market growth, and sales) and financial performance (such as net income, return on
capital, and earnings per share).
MBA Capstone Market Strategy Course
Approach A heavy use of marketing case studies and a marketing simulation is
common. This course, besides its focus on applying students’ marketing
knowledge acquired in previous courses, introduces more advanced
concepts and serves to integrate market strategies and performance with
the overall success of a business.
Objective Present and apply advanced marketing concepts and tools. This is
generally a second-year MBA or MBA capstone marketing course, which
focuses on applying marketing knowledge in the development of market
strategies.
Book The book plays a supporting role in Chapters 1 to 10 and, depending on
previous marketing courses, would be used to present new content in
Chapters 11 to 16.
Chapters 3 to 6 (market analysis) and Chapters 7 to 10 (tactical marketing strategies) could be assigned as
needed to support specific marketing cases and lectures.
Even if covered in a previous course, I strongly believe the concepts and core messages presented in
Chapters 1 and 2 need to be reinforced. Of particular importance is the impact of market orientation and
customer satisfaction levels on profitability (Chapter 1), as well as the marketing metrics in both chapters
and the mechanics of the net marketing contribution in Chapter 2.
Chapters 11, 12, and 13 (portfolio analysis and offensive and defensive strategic marketing plans) deserve
extensive attention and class discussion in this course.
Chapter 14 (developing a marketing plan) and Chapter 15 (implementing a marketing plan) are also
important topics for this course. In many instances, they may be coordinated with a marketing simulation or
major case study in building a marketing plan.
Chapter 16 is included in the book specifically for this course. It goes beyond the impact of marketing
strategies on sales, market share, and the net marketing contribution to show how market strategies also
affect net profit, assets, return on assets and, ultimately, shareholder value. The chapter integrates
marketing with accounting and finance.
Loading page 6...
Market-Based Management
Sixth Edition – v –
Instructor’s Manual – Chapter 16
Executive MBA Market-Based Management Course
Objective Introduce a complete picture of marketing and market strategies in a
relatively short time frame (7 to 10 weeks).
Approach Marketing case studies are used to present the realism of marketing,
while the book plays an important role in laying the foundation for
marketing concepts and tools.
Book Because time is limited and these students are usually working full time,
the book ‘s role is to bring students up to speed on the marketing
concepts and tools that they will apply in marketing case studies.
Chapters 1 and 2 are critical. Students can use these chapters to develop a good understanding of the
importance of market orientation and customer satisfaction (Chapter 1) and the role of marketing metrics and
the net marketing contribution (Chapter 2) in evaluating the success of a market strategy.
Chapters 3 to 6 need to be covered in detail since they are the bedrock from which market strategies are
created. I suggest two chapters per week in covering market analysis.
Chapters 7 and 8 can be presented as a product-price positioning session in one week, and Chapters 9 and
10, the delivery of the positioning strategy, in a second session. Thus, over two sessions, an instructor would
fully cover the tactical marketing strategies.
Chapters 11 to 13 (portfolio analysis and offensive and defensive strategic market plans) go together and
could easily be covered in one session.
Chapter 14 (developing a marketing plan) requires its own full session. The sample marketing plan at the
end of the chapter will greatly facilitate the session.
Chapter 15 (strategy implementation) describes the roadblocks to a successful implementation of a market
strategy, and Chapter 16 (the profit impact of market-based management) covers marketing’s impacts on
sales, costs, assets, cash flow, profitability, and, ultimately, shareholder value. The material these chapters
contain is particularly appropriate for the concluding portion of the Executive MBA Marketing Course.
MBA Market Strategy Course —
With a Focus on Building a Marketing Plan
Objective To present a comprehensive application of market strategy concepts and
tools within the context of creating a marketing plan.
Approach Using marketing case studies, a marketing simulation, or a field project,
the approach is to apply marketing concepts and tools in the
development of a comprehensive marketing plan.
Book For a course with a marketing plan as an important part of the course,
with or without a marketing simulation or case studies, the book could be
used in the following way:
Start with Chapters 1 and 2 to reinforce the importance of market orientation, customer satisfaction, and
market-based management, particularly the concept of the net marketing contribution in Chapter 2.
Cover Chapter 14 (developing a marketing plan), perhaps with a case study, to lay out the process of
creating a strategic marketing plan.
Next cover the material on strategic market planning in Chapters 11 to 13 and set the strategic direction for
the marketing plan.
Then use Chapters 3 to 6 (as needed) to build the situation analysis for the marketing plan. For example, if
you feel students need more work on market analysis, Chapter 3 could be assigned.
Chapters 7 to 10 would be assigned to help students with the development of specific marketing tactics
needed to accomplish the objectives of the strategic market plan.
Chapters 14 and 15 (marketing planning and implementation) could be covered near the end of the term,
depending on the instructor’s individual preference for presenting this topic. The same is true for Chapter 16
(profit impact of marketing strategies).
Sixth Edition – v –
Instructor’s Manual – Chapter 16
Executive MBA Market-Based Management Course
Objective Introduce a complete picture of marketing and market strategies in a
relatively short time frame (7 to 10 weeks).
Approach Marketing case studies are used to present the realism of marketing,
while the book plays an important role in laying the foundation for
marketing concepts and tools.
Book Because time is limited and these students are usually working full time,
the book ‘s role is to bring students up to speed on the marketing
concepts and tools that they will apply in marketing case studies.
Chapters 1 and 2 are critical. Students can use these chapters to develop a good understanding of the
importance of market orientation and customer satisfaction (Chapter 1) and the role of marketing metrics and
the net marketing contribution (Chapter 2) in evaluating the success of a market strategy.
Chapters 3 to 6 need to be covered in detail since they are the bedrock from which market strategies are
created. I suggest two chapters per week in covering market analysis.
Chapters 7 and 8 can be presented as a product-price positioning session in one week, and Chapters 9 and
10, the delivery of the positioning strategy, in a second session. Thus, over two sessions, an instructor would
fully cover the tactical marketing strategies.
Chapters 11 to 13 (portfolio analysis and offensive and defensive strategic market plans) go together and
could easily be covered in one session.
Chapter 14 (developing a marketing plan) requires its own full session. The sample marketing plan at the
end of the chapter will greatly facilitate the session.
Chapter 15 (strategy implementation) describes the roadblocks to a successful implementation of a market
strategy, and Chapter 16 (the profit impact of market-based management) covers marketing’s impacts on
sales, costs, assets, cash flow, profitability, and, ultimately, shareholder value. The material these chapters
contain is particularly appropriate for the concluding portion of the Executive MBA Marketing Course.
MBA Market Strategy Course —
With a Focus on Building a Marketing Plan
Objective To present a comprehensive application of market strategy concepts and
tools within the context of creating a marketing plan.
Approach Using marketing case studies, a marketing simulation, or a field project,
the approach is to apply marketing concepts and tools in the
development of a comprehensive marketing plan.
Book For a course with a marketing plan as an important part of the course,
with or without a marketing simulation or case studies, the book could be
used in the following way:
Start with Chapters 1 and 2 to reinforce the importance of market orientation, customer satisfaction, and
market-based management, particularly the concept of the net marketing contribution in Chapter 2.
Cover Chapter 14 (developing a marketing plan), perhaps with a case study, to lay out the process of
creating a strategic marketing plan.
Next cover the material on strategic market planning in Chapters 11 to 13 and set the strategic direction for
the marketing plan.
Then use Chapters 3 to 6 (as needed) to build the situation analysis for the marketing plan. For example, if
you feel students need more work on market analysis, Chapter 3 could be assigned.
Chapters 7 to 10 would be assigned to help students with the development of specific marketing tactics
needed to accomplish the objectives of the strategic market plan.
Chapters 14 and 15 (marketing planning and implementation) could be covered near the end of the term,
depending on the instructor’s individual preference for presenting this topic. The same is true for Chapter 16
(profit impact of marketing strategies).
Loading page 7...
Loading page 8...
Market-Based Management
Sixth Edition – 1 –
Instructor’s Manual – Chapter 1
CHAPTER 1
Customer Focus, Customer Performance, and Profit Impact
The single most important thing to remember about any
enterprise is that there are no results inside its walls.
The result of a business is a satisfied customer.
— Peter F. Drucker (1909–2005)
On the Profession of Management
Harvard Business Press
Peter Drucker’s quote could be used to start a discussion on the importance of a customer focus and
measuring customer satisfaction. The managers of many product-focused companies work mostly inside the
walls of their company, with only a fraction of their time given to connecting with customers and improving
customer satisfaction. You could ask students for their thoughts on why this is so.
Introduction: Customer Complaint and Social Media
Here’s a great example of “customer voice,” the power of social media, and how not to handle a customer
complaint. After a United Airlines flight, a passenger found that a $3,500 guitar he had checked in as luggage
had been badly damaged. The passenger jumped through all of the proper hoops to obtain compensation from
United, but to no avail. After realizing United was not going to pay the replacement cost, the passenger made a
YouTube video of himself singing about the incident. The video generated 4 million views and propelled the
man on his singing career. United soon offered to make compensation, and the passenger requested that it be
donated to a music school. United says it is using his video in its training programs. (The incident is also a
Harvard Business School Case Study and is listed in the HBS case studies that follow.) You can view the video
at youtube.com/watch?v=5YGc4zOqozo.
Listed here are three kinds of business travelers categorized by their levels of customer satisfaction. Discuss
how the sales and profits generated by each type of customer impacts the overall sales and profits of an airline.
Customer 1. The business traveler is a very satisfied, loyal customer who flies this airline whenever possible
(eight times a year).
Customer 2. The business traveler is a somewhat satisfied, non-loyal customer who flies this airline
occasionally (three times a year).
Customer 3. The business traveler is a dissatisfied customer who flies this airline only when necessary
(once a year).
Teaching Objectives
Demonstrate the role that a strong customer focus plays in building marketing strategies that deliver above-
average levels of customer satisfaction and profitability.
Explain how a business can link its customer complaint behavior to its levels of customer satisfaction and
customer retention, and show why this link has a positive impact on profitability.
Extend this understanding of customer satisfaction and retention to customer loyalty and customer loyalty
management, and show why combining customer loyalty and customer profitability allows a business to
better manage both.
Harvard Business School Case Materials
United Breaks Guitars (2010). HBS Case 10057-PDF-ENG. When social media propagate a complaint
about poor customer service, an international media event ensues. How do viral videos spread and what can
firms do about them? This case dissects an incident in which a disgruntled customer used YouTube and
Twitter to spread a music video detailing United Airlines' mishandling of his $3,500 guitar and the company's
subsequent refusal to compensate him. The song was called "United Breaks Guitars." Within one week it
received 3 million views and mainstream news coverage followed, with CNN, The Wall Street Journal, the
BBC, CBS’s “The Morning Show,” and many other print and electronic outlets picking up the story. The
mechanics of viral propagation are uncovered and the limited opportunities for response by the firm are
revealed. The case supports the notion of the Internet as an insurgent medium, better at attack than at
defense.
Sixth Edition – 1 –
Instructor’s Manual – Chapter 1
CHAPTER 1
Customer Focus, Customer Performance, and Profit Impact
The single most important thing to remember about any
enterprise is that there are no results inside its walls.
The result of a business is a satisfied customer.
— Peter F. Drucker (1909–2005)
On the Profession of Management
Harvard Business Press
Peter Drucker’s quote could be used to start a discussion on the importance of a customer focus and
measuring customer satisfaction. The managers of many product-focused companies work mostly inside the
walls of their company, with only a fraction of their time given to connecting with customers and improving
customer satisfaction. You could ask students for their thoughts on why this is so.
Introduction: Customer Complaint and Social Media
Here’s a great example of “customer voice,” the power of social media, and how not to handle a customer
complaint. After a United Airlines flight, a passenger found that a $3,500 guitar he had checked in as luggage
had been badly damaged. The passenger jumped through all of the proper hoops to obtain compensation from
United, but to no avail. After realizing United was not going to pay the replacement cost, the passenger made a
YouTube video of himself singing about the incident. The video generated 4 million views and propelled the
man on his singing career. United soon offered to make compensation, and the passenger requested that it be
donated to a music school. United says it is using his video in its training programs. (The incident is also a
Harvard Business School Case Study and is listed in the HBS case studies that follow.) You can view the video
at youtube.com/watch?v=5YGc4zOqozo.
Listed here are three kinds of business travelers categorized by their levels of customer satisfaction. Discuss
how the sales and profits generated by each type of customer impacts the overall sales and profits of an airline.
Customer 1. The business traveler is a very satisfied, loyal customer who flies this airline whenever possible
(eight times a year).
Customer 2. The business traveler is a somewhat satisfied, non-loyal customer who flies this airline
occasionally (three times a year).
Customer 3. The business traveler is a dissatisfied customer who flies this airline only when necessary
(once a year).
Teaching Objectives
Demonstrate the role that a strong customer focus plays in building marketing strategies that deliver above-
average levels of customer satisfaction and profitability.
Explain how a business can link its customer complaint behavior to its levels of customer satisfaction and
customer retention, and show why this link has a positive impact on profitability.
Extend this understanding of customer satisfaction and retention to customer loyalty and customer loyalty
management, and show why combining customer loyalty and customer profitability allows a business to
better manage both.
Harvard Business School Case Materials
United Breaks Guitars (2010). HBS Case 10057-PDF-ENG. When social media propagate a complaint
about poor customer service, an international media event ensues. How do viral videos spread and what can
firms do about them? This case dissects an incident in which a disgruntled customer used YouTube and
Twitter to spread a music video detailing United Airlines' mishandling of his $3,500 guitar and the company's
subsequent refusal to compensate him. The song was called "United Breaks Guitars." Within one week it
received 3 million views and mainstream news coverage followed, with CNN, The Wall Street Journal, the
BBC, CBS’s “The Morning Show,” and many other print and electronic outlets picking up the story. The
mechanics of viral propagation are uncovered and the limited opportunities for response by the firm are
revealed. The case supports the notion of the Internet as an insurgent medium, better at attack than at
defense.
Loading page 9...
Market-Based Management
Sixth Edition – 2 –
Instructor’s Manual – Chapter 1
Rosewood Hotels & Resorts: Branding to Increase Customer Profitability and Lifetime Value (2007).
HBS Case 2087-PDF-ENG. Rosewood Hotels & Resorts, a small luxury private hotel management firm
running a collection of 12 individually branded hotels and resorts in several countries, was wondering how to
foster customer retention and loyalty and capture the maximum value from its 115,000 guests. Rosewood
had always allowed each hotel to stand as its own individual brand, with the Rosewood name presented as a
muted sub-brand, if at all. Now Rosewood's new leadership is contemplating whether the firm should
significantly increase the prominence of the corporate identity, making Rosewood a corporate brand. The
main challenge Rosewood's executives face is to assess whether the potential economic benefits from
increased guest retention can outweigh the $1 million marketing investment needed to implement the
corporate branding strategy. The central focus is a quantitative assignment that asks students to calculate
how customer lifetime value would be affected by a shift from individual branding to corporate branding.
Learning Objectives: To understand the concept of customer lifetime value and the importance of
maximizing a customer's lifetime value for the firm; to understand the components of customer lifetime value
and how each component is estimated; to learn how to calculate customer lifetime value based on a
combination of financial and non-financial data; and to explore the risks and opportunities associated with
corporate branding versus the branding of individual products.
Customer Profitability and Customer Relationship Management at RBC Financial Group (2007). HBS
Case 102072. The Royal Bank of Canada uses customer relationship management and customer
profitability tools to gain a competitive advantage in Canada’s increasingly crowded financial service market.
The case presents two pricing and customer management issues: one from the point of view of the vice
president of customer relationship marketing and the other from a line manager’s perspective. 20 pages.
Scott Cook and Intuit. HBS Case 9-396-282. Presents how CEO Scott Cook built a company culture
around customer research and customer service and used this market orientation to drive new product
development and the success of Intuit, the producer of Quicken and other software.
Hilton Honors Worldwide: Loyalty Wars. HBS Case 9-501-010. Presents Hilton Hotels’ frequent-guest
program and the company’s efforts to build customer loyalty and retention in an increasingly competitive
environment. 18 pages, with teaching notes.
FedEx: The Money-Back Guarantee (A). HBS Case 9-690-004. Discusses how FedEx created a major
headache for a customer who then made a formal complaint to the company’s CEO. The problem exposed
deficiencies in the company’s service and in the guarantee it advertised heavily. Teaching Note: 5-690-034.
Four supplements: B, C, D, and E.
Regency Facsimile, Inc. HBS Case 9-591-037. The vice president of customer service must justify the
customer service department’s dual mission of maximizing customer satisfaction and profits. Some in the
organization believe that the customer service department should only be focused on customer satisfaction.
Teaching Note: 5-592-058.
Market-Based Strategic Thinking
1. How would a business like Enterprise Car Rental manage its customer focus using the customer-
focus behaviors and practices presented in Chapter 1?
The three major drivers of a strong customer focus, as presented in Figure 1-3, are summarized here with
respect to Enterprise Rental Car.
Customer Leadership ─ CEO’s message: “Satisfied is not good enough. Completely satisfied—that’s a
big deal. A completely satisfied customer is at least three times more likely to return than one who’s just
satisfied.” Company promotions go to those managers whose rental offices have above-average levels
of customer satisfaction. Enterprise trains its new personnel not only in its procedures for renting
vehicles to the public, but in the company’s philosophy of customer focus.
Voice of the Customer ─ Every month, Enterprise interviews a sampling of customers from each of its
rental offices to determine the level of customer satisfaction. If during a customer interview an employee
is mentioned by name, the next morning that employee receives a copy of the customer’s comments. If
a customer mentions that the vehicle was dirty or expresses any other dissatisfaction, the comment
goes to the manager of the office where the customer rented it.
Customer Metrics ─ The company measures customer satisfaction with every customer transaction
and pays close attention to the percentage of customers who are “completely satisfied.”
Sixth Edition – 2 –
Instructor’s Manual – Chapter 1
Rosewood Hotels & Resorts: Branding to Increase Customer Profitability and Lifetime Value (2007).
HBS Case 2087-PDF-ENG. Rosewood Hotels & Resorts, a small luxury private hotel management firm
running a collection of 12 individually branded hotels and resorts in several countries, was wondering how to
foster customer retention and loyalty and capture the maximum value from its 115,000 guests. Rosewood
had always allowed each hotel to stand as its own individual brand, with the Rosewood name presented as a
muted sub-brand, if at all. Now Rosewood's new leadership is contemplating whether the firm should
significantly increase the prominence of the corporate identity, making Rosewood a corporate brand. The
main challenge Rosewood's executives face is to assess whether the potential economic benefits from
increased guest retention can outweigh the $1 million marketing investment needed to implement the
corporate branding strategy. The central focus is a quantitative assignment that asks students to calculate
how customer lifetime value would be affected by a shift from individual branding to corporate branding.
Learning Objectives: To understand the concept of customer lifetime value and the importance of
maximizing a customer's lifetime value for the firm; to understand the components of customer lifetime value
and how each component is estimated; to learn how to calculate customer lifetime value based on a
combination of financial and non-financial data; and to explore the risks and opportunities associated with
corporate branding versus the branding of individual products.
Customer Profitability and Customer Relationship Management at RBC Financial Group (2007). HBS
Case 102072. The Royal Bank of Canada uses customer relationship management and customer
profitability tools to gain a competitive advantage in Canada’s increasingly crowded financial service market.
The case presents two pricing and customer management issues: one from the point of view of the vice
president of customer relationship marketing and the other from a line manager’s perspective. 20 pages.
Scott Cook and Intuit. HBS Case 9-396-282. Presents how CEO Scott Cook built a company culture
around customer research and customer service and used this market orientation to drive new product
development and the success of Intuit, the producer of Quicken and other software.
Hilton Honors Worldwide: Loyalty Wars. HBS Case 9-501-010. Presents Hilton Hotels’ frequent-guest
program and the company’s efforts to build customer loyalty and retention in an increasingly competitive
environment. 18 pages, with teaching notes.
FedEx: The Money-Back Guarantee (A). HBS Case 9-690-004. Discusses how FedEx created a major
headache for a customer who then made a formal complaint to the company’s CEO. The problem exposed
deficiencies in the company’s service and in the guarantee it advertised heavily. Teaching Note: 5-690-034.
Four supplements: B, C, D, and E.
Regency Facsimile, Inc. HBS Case 9-591-037. The vice president of customer service must justify the
customer service department’s dual mission of maximizing customer satisfaction and profits. Some in the
organization believe that the customer service department should only be focused on customer satisfaction.
Teaching Note: 5-592-058.
Market-Based Strategic Thinking
1. How would a business like Enterprise Car Rental manage its customer focus using the customer-
focus behaviors and practices presented in Chapter 1?
The three major drivers of a strong customer focus, as presented in Figure 1-3, are summarized here with
respect to Enterprise Rental Car.
Customer Leadership ─ CEO’s message: “Satisfied is not good enough. Completely satisfied—that’s a
big deal. A completely satisfied customer is at least three times more likely to return than one who’s just
satisfied.” Company promotions go to those managers whose rental offices have above-average levels
of customer satisfaction. Enterprise trains its new personnel not only in its procedures for renting
vehicles to the public, but in the company’s philosophy of customer focus.
Voice of the Customer ─ Every month, Enterprise interviews a sampling of customers from each of its
rental offices to determine the level of customer satisfaction. If during a customer interview an employee
is mentioned by name, the next morning that employee receives a copy of the customer’s comments. If
a customer mentions that the vehicle was dirty or expresses any other dissatisfaction, the comment
goes to the manager of the office where the customer rented it.
Customer Metrics ─ The company measures customer satisfaction with every customer transaction
and pays close attention to the percentage of customers who are “completely satisfied.”
Loading page 10...
Market-Based Management
Sixth Edition – 3 –
Instructor’s Manual – Chapter 1
2. Why would a strong customer focus and high levels of customer satisfaction allow Southwest
Airlines to be more profitable than other airlines?
With a strong focus on improving the customer experience Southwest Airlines is able to achieve higher
levels of customer satisfaction. This allows the airline to more easily attract new customers and keep
current customers. Because it cost 5 to 10 times more to obtain a new customer than to keep current one,
Southwest can lower its cost of marketing and sales substantially and thereby produce a higher level of
operating income as a percentage of sales.
3. Why would a very satisfied Apple Mac customer be more profitable than a somewhat satisfied
Apple Mac customer?
Very satisfied Mac customers are more likely to buy other Apple products, including upgrades. Somewhat
satisfied customers are generally less motivated to buy upgrades and products such as the iPod, iPhone,
or iPad. For Apple, an added bonus in having a high percentage of very satisfied Mac customers is that the
enthusiasm of these customers leads many to recommend the Mac to others.
4. Why would companies with high levels of customer satisfaction produce larger gains in their stock
prices than the average S&P 500 company?
Companies such as Apple, Southwest Airlines, and Clorox have above-average levels of customer
satisfaction relative to competing peers, as shown in Figure 1-4. High levels of customer satisfaction are
correlated with high levels of customer retention and profitability. As shown in Figure 1-2, companies with
above-average customer satisfaction outperform the S&P 500.
5. Lexus has been known for high levels of customer satisfaction. How would this impact customer
retention over time?
Very satisfied customers are more likely to return as customers than less satisfied customers. As the CEO
of Enterprise Car rental stated, “A completely satisfied customer is at least three times more likely to return
than one who’s just satisfied.” With an above-average level of customer satisfaction, Lexus has a great
chance of retaining a customer’s next purchase.
6. If Lexus has an average customer retention of 80 percent, how many purchases would the average
customer make over their life as a Lexus customer?
If we assume Lexus customers replace their cars every 5 years on average, they would rebuy every 5
years for 25 years. The high customer retention rate gives Lexus a tremendous competitive advantage in
that it optimizes marketing expenses. Keeping customers is much less expensive than acquiring new ones.
7. If a new coffee company had above-average profits its first couple of years but estimates of
intentions to repurchase (see Figure 1-9) were declining, with customer retention expected to fall
from 67 to 50 percent, what would be the likely impact on future profits?
There are two ways to look at the profit impact. In Figure 1-8 we can see how profitability increases when
customer retention improves from 70 to 80 percent. For a coffee company going from a customer retention
of 67 to 50 percent, profits would decrease in the same way. We could also compute the customer lifetime
value as presented in Figure 1-11. The customer life drops from 3 to 2 years when retention falls from 67 to
50 percent (see Figure 1-10 for the math). With 1 less year of customer cash flow, the customer lifetime
value (customer profitability) goes down.
8. Why would extending the life of an online fashion retail customer from 4 to 5 years impact profits?
The are two important considerations here. First, the longer a customer is retained, the more cash flow
there is for offsetting the cost of acquiring the customer (often 5 to 10 times the cost of retaining a
customer). By increasing the average life of a customer from 4 to 5 years, the average customer lifetime
value increases. That, in turn, increases company profits. In addition, the longer online fashion customers
remain as customers, the more likely they are to increase their purchase quantity and to buy higher margin
products, which also increases the average customer lifetime value and company profits.
9. What makes an Apple customer loyal, and why are loyal customers more profitable than other
customers?
Apple delivers unique products with levels of customer satisfaction. For Apple customers, there are no real
substitutes, which helps make Apple more profitable than a company with many substitutes. Apple’s high
Sixth Edition – 3 –
Instructor’s Manual – Chapter 1
2. Why would a strong customer focus and high levels of customer satisfaction allow Southwest
Airlines to be more profitable than other airlines?
With a strong focus on improving the customer experience Southwest Airlines is able to achieve higher
levels of customer satisfaction. This allows the airline to more easily attract new customers and keep
current customers. Because it cost 5 to 10 times more to obtain a new customer than to keep current one,
Southwest can lower its cost of marketing and sales substantially and thereby produce a higher level of
operating income as a percentage of sales.
3. Why would a very satisfied Apple Mac customer be more profitable than a somewhat satisfied
Apple Mac customer?
Very satisfied Mac customers are more likely to buy other Apple products, including upgrades. Somewhat
satisfied customers are generally less motivated to buy upgrades and products such as the iPod, iPhone,
or iPad. For Apple, an added bonus in having a high percentage of very satisfied Mac customers is that the
enthusiasm of these customers leads many to recommend the Mac to others.
4. Why would companies with high levels of customer satisfaction produce larger gains in their stock
prices than the average S&P 500 company?
Companies such as Apple, Southwest Airlines, and Clorox have above-average levels of customer
satisfaction relative to competing peers, as shown in Figure 1-4. High levels of customer satisfaction are
correlated with high levels of customer retention and profitability. As shown in Figure 1-2, companies with
above-average customer satisfaction outperform the S&P 500.
5. Lexus has been known for high levels of customer satisfaction. How would this impact customer
retention over time?
Very satisfied customers are more likely to return as customers than less satisfied customers. As the CEO
of Enterprise Car rental stated, “A completely satisfied customer is at least three times more likely to return
than one who’s just satisfied.” With an above-average level of customer satisfaction, Lexus has a great
chance of retaining a customer’s next purchase.
6. If Lexus has an average customer retention of 80 percent, how many purchases would the average
customer make over their life as a Lexus customer?
If we assume Lexus customers replace their cars every 5 years on average, they would rebuy every 5
years for 25 years. The high customer retention rate gives Lexus a tremendous competitive advantage in
that it optimizes marketing expenses. Keeping customers is much less expensive than acquiring new ones.
7. If a new coffee company had above-average profits its first couple of years but estimates of
intentions to repurchase (see Figure 1-9) were declining, with customer retention expected to fall
from 67 to 50 percent, what would be the likely impact on future profits?
There are two ways to look at the profit impact. In Figure 1-8 we can see how profitability increases when
customer retention improves from 70 to 80 percent. For a coffee company going from a customer retention
of 67 to 50 percent, profits would decrease in the same way. We could also compute the customer lifetime
value as presented in Figure 1-11. The customer life drops from 3 to 2 years when retention falls from 67 to
50 percent (see Figure 1-10 for the math). With 1 less year of customer cash flow, the customer lifetime
value (customer profitability) goes down.
8. Why would extending the life of an online fashion retail customer from 4 to 5 years impact profits?
The are two important considerations here. First, the longer a customer is retained, the more cash flow
there is for offsetting the cost of acquiring the customer (often 5 to 10 times the cost of retaining a
customer). By increasing the average life of a customer from 4 to 5 years, the average customer lifetime
value increases. That, in turn, increases company profits. In addition, the longer online fashion customers
remain as customers, the more likely they are to increase their purchase quantity and to buy higher margin
products, which also increases the average customer lifetime value and company profits.
9. What makes an Apple customer loyal, and why are loyal customers more profitable than other
customers?
Apple delivers unique products with levels of customer satisfaction. For Apple customers, there are no real
substitutes, which helps make Apple more profitable than a company with many substitutes. Apple’s high
Loading page 11...
Market-Based Management
Sixth Edition – 4 –
Instructor’s Manual – Chapter 1
levels of customer satisfaction and customer loyalty translate into repeat purchases of often higher-priced
products. Many Apple customers are loyal to the company, not just to certain Apple products.
10. How could a frequent-flyer airline customer become a captive customer? How do captive airline
customers contribute to current and future company profits?
A captive customer is usually a customer who cannot switch. An airline traveler who lives in a small city
served by only one airline is a captive customer, having no choice but to fly an airline that the person may
detest. Frequent-flyer programs create another kind of captive customer. Customers who have become
dissatisfied with a particular airline but who have already accumulated miles on the airline’s frequent-flyer
program will often still fly the airline rather than switch. In this way, the airline retains many of its
dissatisfied customers, which contributes to current and future profits.
11. How would you manage a repeat McDonald’s customer who had a below-average (low) purchase
amount?
This is a tough situation. McDonald’s certainly cannot impose a minimum purchase amount. But it can offer
better prices with combined sales, such as coffee at half price with a breakfast order between 6 and 8 a.m.
It can also—and often does—offer specials on certain days of the week, such as two sandwiches priced
less than two would normally cost. Senior specials also attract customers looking for a good value,
resulting in a higher average transaction amount.
12. What could cause a business to attract unprofitable customers?
No business intentionally wants to attract unprofitable customers, but it happens for two reasons. One, the
business does not know the target market for its product and attracts customers who do not buy at a level
that makes them profitable as customers. Two, the business does not know which customers not to attract.
For every business, there are instances of bad fits between customer needs and the business’s product
offering. Knowing who is not a customer is just as important as knowing who is a customer.
13. How could a repeat customer with a low lifetime value be more valuable than a repeat customer
with a high lifetime value?
To add some context, let’s consider a coffee shop business. Customer A has a low lifetime value and
Customer B has a high lifetime value. Customer B buys a lot and is a repeat customer, but this customer
often buys at other coffee shops and is not particularly loyal to any. Customer A spends less at the coffee
shop but buys only from this coffee shop. Customer A is extremely loyal and tells friends and relatives
about the coffee shop, thereby generating new customers for the shop. Hence, Customer A’s loyalty leads
to a second level of customer cash flow for the coffee shop. In the end, Customer A, who spends relatively
little at the coffee shop, could be more profitable than Customer B, who spends a lot at the coffee shop.
14. How should a first-time machine tool customer be managed differently from a returning customer?
New machine tool customers need extra customer service and training to ensure that their initial
experiences are positive. In many instances, it is just a matter of answering questions typical of new
customers. Repeat customers should also be scrutinized from time to time to make sure that they are using
the equipment correctly and obtaining the designed levels of productivity a particular tool offers. Following
up with repeat customers also gives a company the opportunity to discover the experiences customers
would like but cannot obtain in using the machine tool that the company sells.
15. For an industrial supply company, how could a returning new customer have a higher customer
lifetime value than a first-time customer?
Returning customers usually pick up about where they left off with respect to the purchase and usage of
the industrial supplies that the company offers. Brand new customers—those with no prior experience with
the company—are more likely to buy a more limited array of products, and smaller amounts of them, in
their first years as a new customer. It may take 4 to 5 years for a new customer to match the average
purchase amount of a return customer, as shown in the table. Thus, the 5-year lifetime value of a return
customer will be significantly higher than that of a brand new customer.
Sixth Edition – 4 –
Instructor’s Manual – Chapter 1
levels of customer satisfaction and customer loyalty translate into repeat purchases of often higher-priced
products. Many Apple customers are loyal to the company, not just to certain Apple products.
10. How could a frequent-flyer airline customer become a captive customer? How do captive airline
customers contribute to current and future company profits?
A captive customer is usually a customer who cannot switch. An airline traveler who lives in a small city
served by only one airline is a captive customer, having no choice but to fly an airline that the person may
detest. Frequent-flyer programs create another kind of captive customer. Customers who have become
dissatisfied with a particular airline but who have already accumulated miles on the airline’s frequent-flyer
program will often still fly the airline rather than switch. In this way, the airline retains many of its
dissatisfied customers, which contributes to current and future profits.
11. How would you manage a repeat McDonald’s customer who had a below-average (low) purchase
amount?
This is a tough situation. McDonald’s certainly cannot impose a minimum purchase amount. But it can offer
better prices with combined sales, such as coffee at half price with a breakfast order between 6 and 8 a.m.
It can also—and often does—offer specials on certain days of the week, such as two sandwiches priced
less than two would normally cost. Senior specials also attract customers looking for a good value,
resulting in a higher average transaction amount.
12. What could cause a business to attract unprofitable customers?
No business intentionally wants to attract unprofitable customers, but it happens for two reasons. One, the
business does not know the target market for its product and attracts customers who do not buy at a level
that makes them profitable as customers. Two, the business does not know which customers not to attract.
For every business, there are instances of bad fits between customer needs and the business’s product
offering. Knowing who is not a customer is just as important as knowing who is a customer.
13. How could a repeat customer with a low lifetime value be more valuable than a repeat customer
with a high lifetime value?
To add some context, let’s consider a coffee shop business. Customer A has a low lifetime value and
Customer B has a high lifetime value. Customer B buys a lot and is a repeat customer, but this customer
often buys at other coffee shops and is not particularly loyal to any. Customer A spends less at the coffee
shop but buys only from this coffee shop. Customer A is extremely loyal and tells friends and relatives
about the coffee shop, thereby generating new customers for the shop. Hence, Customer A’s loyalty leads
to a second level of customer cash flow for the coffee shop. In the end, Customer A, who spends relatively
little at the coffee shop, could be more profitable than Customer B, who spends a lot at the coffee shop.
14. How should a first-time machine tool customer be managed differently from a returning customer?
New machine tool customers need extra customer service and training to ensure that their initial
experiences are positive. In many instances, it is just a matter of answering questions typical of new
customers. Repeat customers should also be scrutinized from time to time to make sure that they are using
the equipment correctly and obtaining the designed levels of productivity a particular tool offers. Following
up with repeat customers also gives a company the opportunity to discover the experiences customers
would like but cannot obtain in using the machine tool that the company sells.
15. For an industrial supply company, how could a returning new customer have a higher customer
lifetime value than a first-time customer?
Returning customers usually pick up about where they left off with respect to the purchase and usage of
the industrial supplies that the company offers. Brand new customers—those with no prior experience with
the company—are more likely to buy a more limited array of products, and smaller amounts of them, in
their first years as a new customer. It may take 4 to 5 years for a new customer to match the average
purchase amount of a return customer, as shown in the table. Thus, the 5-year lifetime value of a return
customer will be significantly higher than that of a brand new customer.
Loading page 12...
Market-Based Management
Sixth Edition – 5 –
Instructor’s Manual – Chapter 1
Marketing Performance Tools and Application Exercises
1.1 Customer Satisfaction and Profitability: Figure 1-6 is used with this marketing performance tool to
answer analysis questions A (below) and B (next page). The starting data are shown here to make
comparisons to the analysis questions easy.
A. How would average customer sales and average customer profit change for a business with 10 percent
“very satisfied” customers, 35 percent “satisfied” customers, and 55 percent “somewhat satisfied”
customers?
Teaching Note: This change in customer satisfaction would lower the average sales per customer by
$95 and lower the average customer profit from $250 to $178. With 10,000 customers, for example,
profits would drop by $720,000.
B. How would the average customer sales and average customer profit change if this business was able
to shift customer satisfaction to 35 percent “very satisfied,” 35 percent “satisfied,” and 30 percent
“somewhat satisfied”?
Teaching Note: This level of improvement in customer satisfaction would increase the average sales
per customer by $145 and increase the average customer profit from $250 to $328. With 10,000
customers, for example, the improved customer satisfaction index would increase profits by $780,000.
CSI Customer Percent Gross Retention Customer
Score Sales Margin Profit Cost Profit
71 $565 45.5% $278 $100 $178
CSI Customer Percent Gross Retention Customer
Score Sales Margin Profit Cost Profit
81 $790 50.5% $428 $100 $328
Sixth Edition – 5 –
Instructor’s Manual – Chapter 1
Marketing Performance Tools and Application Exercises
1.1 Customer Satisfaction and Profitability: Figure 1-6 is used with this marketing performance tool to
answer analysis questions A (below) and B (next page). The starting data are shown here to make
comparisons to the analysis questions easy.
A. How would average customer sales and average customer profit change for a business with 10 percent
“very satisfied” customers, 35 percent “satisfied” customers, and 55 percent “somewhat satisfied”
customers?
Teaching Note: This change in customer satisfaction would lower the average sales per customer by
$95 and lower the average customer profit from $250 to $178. With 10,000 customers, for example,
profits would drop by $720,000.
B. How would the average customer sales and average customer profit change if this business was able
to shift customer satisfaction to 35 percent “very satisfied,” 35 percent “satisfied,” and 30 percent
“somewhat satisfied”?
Teaching Note: This level of improvement in customer satisfaction would increase the average sales
per customer by $145 and increase the average customer profit from $250 to $328. With 10,000
customers, for example, the improved customer satisfaction index would increase profits by $780,000.
CSI Customer Percent Gross Retention Customer
Score Sales Margin Profit Cost Profit
71 $565 45.5% $278 $100 $178
CSI Customer Percent Gross Retention Customer
Score Sales Margin Profit Cost Profit
81 $790 50.5% $428 $100 $328
Loading page 13...
Market-Based Management
Sixth Edition – 6 –
Instructor’s Manual – Chapter 1
1.2 Customer Retention: Figure 1-7 is used with this marketing performance tool to answer questions A (next
page) and B on page 8.
Sixth Edition – 6 –
Instructor’s Manual – Chapter 1
1.2 Customer Retention: Figure 1-7 is used with this marketing performance tool to answer questions A (next
page) and B on page 8.
Loading page 14...
Market-Based Management
Sixth Edition – 7 –
Instructor’s Manual – Chapter 1
A. How would customer retention change if the percentage of all dissatisfied customers decreased to 15
percent and the percentage of all satisfied customers increased to 85 percent?
Teaching Note: As shown above, this improvement in customer satisfaction would reduce the
percentage of dissatisfied customers. The lower percentage of dissatisfied customers in turn improves
customer retention. In this example, customer retention improved from 70 to 80 percent.
Sixth Edition – 7 –
Instructor’s Manual – Chapter 1
A. How would customer retention change if the percentage of all dissatisfied customers decreased to 15
percent and the percentage of all satisfied customers increased to 85 percent?
Teaching Note: As shown above, this improvement in customer satisfaction would reduce the
percentage of dissatisfied customers. The lower percentage of dissatisfied customers in turn improves
customer retention. In this example, customer retention improved from 70 to 80 percent.
Loading page 15...
Market-Based Management
Sixth Edition – 8 –
Instructor’s Manual – Chapter 1
B. Using the original data, how would customer retention change if the percentage of customers who
complained increased from 10 to 50 percent?
Teaching Note: With the same level of customer satisfaction, this change in customer complaint
behavior would enable this business to increase customer retention from 70 to 77.6 percent. As with
question A, an increase in customer retention would increase the average customer life and average
customer profitability.
Sixth Edition – 8 –
Instructor’s Manual – Chapter 1
B. Using the original data, how would customer retention change if the percentage of customers who
complained increased from 10 to 50 percent?
Teaching Note: With the same level of customer satisfaction, this change in customer complaint
behavior would enable this business to increase customer retention from 70 to 77.6 percent. As with
question A, an increase in customer retention would increase the average customer life and average
customer profitability.
Loading page 16...
Market-Based Management
Sixth Edition – 9 –
Instructor’s Manual – Chapter 1
1.3 Customer Lifetime Value: Figure 1-11 is used with this marketing performance tool to answer questions A
and B below.
A. How would the lifetime value of the average customer change if the customer life was shortened from 5
to 4 years?
Teaching Note: A 4-year customer life corresponds with a 75 percent customer retention rate (see
Figure 1-10). This would eliminate year 5 from the customer cash flow. The net result is a decrease in
the lifetime value of a customer from $111.66 to $77.51. Although the customer is still profitable, the
business will lower its overall profitability since it now has to replace that customer every 4 years
instead of every 5 years.
B. How would the lifetime value change if the customer life was extended from 5 to 6 years and in year 6
the net cash flow was $60?
Teaching Note: A 6-year customer life corresponds to an 83.3 percent customer retention rate. If we
add year 6 at the same level of profit as year 5 ($55), then the average customer lifetime value
increases from $111.66 to $142.46, which would have a significant positive impact on overall profits.
1.4 Customer Loyalty and Profitability: Figure 1-17 is used with this marketing performance tool to answer
analysis questions A and B on the next page. The starting data are shown here to make comparisons to
the analysis questions easy.
Sixth Edition – 9 –
Instructor’s Manual – Chapter 1
1.3 Customer Lifetime Value: Figure 1-11 is used with this marketing performance tool to answer questions A
and B below.
A. How would the lifetime value of the average customer change if the customer life was shortened from 5
to 4 years?
Teaching Note: A 4-year customer life corresponds with a 75 percent customer retention rate (see
Figure 1-10). This would eliminate year 5 from the customer cash flow. The net result is a decrease in
the lifetime value of a customer from $111.66 to $77.51. Although the customer is still profitable, the
business will lower its overall profitability since it now has to replace that customer every 4 years
instead of every 5 years.
B. How would the lifetime value change if the customer life was extended from 5 to 6 years and in year 6
the net cash flow was $60?
Teaching Note: A 6-year customer life corresponds to an 83.3 percent customer retention rate. If we
add year 6 at the same level of profit as year 5 ($55), then the average customer lifetime value
increases from $111.66 to $142.46, which would have a significant positive impact on overall profits.
1.4 Customer Loyalty and Profitability: Figure 1-17 is used with this marketing performance tool to answer
analysis questions A and B on the next page. The starting data are shown here to make comparisons to
the analysis questions easy.
Loading page 17...
Market-Based Management
Sixth Edition – 10 –
Instructor’s Manual – Chapter 1
A. How would the average customer profitability change with 25 percent loyal and 25 percent repeat
customers?
Teaching Note: This change would increase the average customer revenue by $13 and the average
customer profit by $9. These may seem like small differences, but for a business with 10,000
customers the impact would be significant.
B. How would the average customer profit change with the following loyalty: 30 percent loyal, 35 percent
repeat, 5 percent captive, 20 percent new, and 10 percent unprofitable?
Teaching Note: These changes would have a much greater impact on sales and profits. Average
customer revenue would increase by $98, and the average customer profit would increase by $45. For
a business with 10,000 customers, the improvement in performance would be significant: overall
customer revenue would increase by $980,000, and customer profits would increase by $450,000.
Sixth Edition – 10 –
Instructor’s Manual – Chapter 1
A. How would the average customer profitability change with 25 percent loyal and 25 percent repeat
customers?
Teaching Note: This change would increase the average customer revenue by $13 and the average
customer profit by $9. These may seem like small differences, but for a business with 10,000
customers the impact would be significant.
B. How would the average customer profit change with the following loyalty: 30 percent loyal, 35 percent
repeat, 5 percent captive, 20 percent new, and 10 percent unprofitable?
Teaching Note: These changes would have a much greater impact on sales and profits. Average
customer revenue would increase by $98, and the average customer profit would increase by $45. For
a business with 10,000 customers, the improvement in performance would be significant: overall
customer revenue would increase by $980,000, and customer profits would increase by $450,000.
Loading page 18...
Market-Based Management
Sixth Edition – 11 –
Instructor’s Manual – Chapter 2
CHAPTER 2
Marketing Metrics and Marketing Profitability
Introductory Exercise
FedEx measures customer satisfaction monthly but measures its service quality daily with a process metric that
tracks the top ten mistakes, weighted by their negative impact on the customer, that result in customer
dissatisfaction. The day on which this internal forward-looking metric was at its lowest (fewest mistakes), FedEx
produced its highest daily profit.
1. Discuss the value of both measures (customer satisfaction and service quality) and how one relates to
the other.
2. Discuss why these are important forward-looking metrics, and how each contributes to performance.
3. Discuss why FedEx’s profit would be at its highest when the company’s internal measure of service
quality was at its lowest (fewest errors).
Teaching Objectives
Present the importance of marketing performance metrics and make clear the characteristics and roles of
external and internal metrics and of forward-looking and backward-looking performance metrics.
Illustrate how a market-based business continues to reengineer itself around markets as customer needs
and competition change and new market opportunities emerge.
Demonstrate the importance of market-level measures of profitability and how the mechanics of the net
marketing contribution can be applied to a variety of marketing strategies.
Harvard Business School Case Materials
Harrah’s Entertainment, Inc. HBS Case 50201. Describes a situation facing Philip Satre, chairman and
CEO of Harrah’s Entertainment Inc. Satre has just read a May 2000 Wall Street Journal story that discussed
the company’s marketing success in targeting low rollers, the 100 percent growth in stock price and profits
for 1999, and the revenue growth of 50 percent, which significantly outpaced the industry. The exciting
article aroused Satre’s desire to know more about the activities of then-COO Gary Loveman and his team of
“propeller heads” with respect to their database marketing efforts and the Total Reward Program. Satre was
interested in two questions: He wanted to know how much these marketing efforts had contributed to
Harrah’s overall performance and whether these marketing results were a one-time event or could be
repeated year after year, especially as competitors move to introduce similar programs. 27 pages.
Buy Low, Sell High: Creating and Extracting Customer Value by Enhancing Organizational Performance.
HBS Case 9-0597-0071. This case study provides a framework for creating customer value and managing
firm-level profitability. It focuses on the use of product line management and customer service to achieve
customer satisfaction and high profitability.
Guest First Hotel (A). HBS Case 9-602-099. Presents a hotel management situation in which customer
loyalty is linked to financial performance. This case uses years of hotel data that students need to analyze to
uncover the relationship between customer loyalty and financial performance. Although there is no
relationship in a single year, over time a key marketing profitability relationship emerges. 4 pages.
Winchell Lighting, Inc. HBS Case 9-187-074. This case documents how a midsize lighting company tracks
it marketing costs, as well as unit costs and allocated costs, to more fully understand its profitability.
Teaching Note: 5-192-034. Supplement: 9-187-075.
Direct Product Profitability at Hannaford Brothers Co. HBS Case 9-591-002. Concerns the pioneering
use of a method of accounting in retailing which takes into account not only sales and the cost of goods sold
but, at the item level, all of the variable costs associated with each item sold. This case focuses on the
strengths and weaknesses of Hannaford’s use of direct product profit and the opportunities for, and
obstacles hindering, improvement and extension of the direct product profit system.
Sixth Edition – 11 –
Instructor’s Manual – Chapter 2
CHAPTER 2
Marketing Metrics and Marketing Profitability
Introductory Exercise
FedEx measures customer satisfaction monthly but measures its service quality daily with a process metric that
tracks the top ten mistakes, weighted by their negative impact on the customer, that result in customer
dissatisfaction. The day on which this internal forward-looking metric was at its lowest (fewest mistakes), FedEx
produced its highest daily profit.
1. Discuss the value of both measures (customer satisfaction and service quality) and how one relates to
the other.
2. Discuss why these are important forward-looking metrics, and how each contributes to performance.
3. Discuss why FedEx’s profit would be at its highest when the company’s internal measure of service
quality was at its lowest (fewest errors).
Teaching Objectives
Present the importance of marketing performance metrics and make clear the characteristics and roles of
external and internal metrics and of forward-looking and backward-looking performance metrics.
Illustrate how a market-based business continues to reengineer itself around markets as customer needs
and competition change and new market opportunities emerge.
Demonstrate the importance of market-level measures of profitability and how the mechanics of the net
marketing contribution can be applied to a variety of marketing strategies.
Harvard Business School Case Materials
Harrah’s Entertainment, Inc. HBS Case 50201. Describes a situation facing Philip Satre, chairman and
CEO of Harrah’s Entertainment Inc. Satre has just read a May 2000 Wall Street Journal story that discussed
the company’s marketing success in targeting low rollers, the 100 percent growth in stock price and profits
for 1999, and the revenue growth of 50 percent, which significantly outpaced the industry. The exciting
article aroused Satre’s desire to know more about the activities of then-COO Gary Loveman and his team of
“propeller heads” with respect to their database marketing efforts and the Total Reward Program. Satre was
interested in two questions: He wanted to know how much these marketing efforts had contributed to
Harrah’s overall performance and whether these marketing results were a one-time event or could be
repeated year after year, especially as competitors move to introduce similar programs. 27 pages.
Buy Low, Sell High: Creating and Extracting Customer Value by Enhancing Organizational Performance.
HBS Case 9-0597-0071. This case study provides a framework for creating customer value and managing
firm-level profitability. It focuses on the use of product line management and customer service to achieve
customer satisfaction and high profitability.
Guest First Hotel (A). HBS Case 9-602-099. Presents a hotel management situation in which customer
loyalty is linked to financial performance. This case uses years of hotel data that students need to analyze to
uncover the relationship between customer loyalty and financial performance. Although there is no
relationship in a single year, over time a key marketing profitability relationship emerges. 4 pages.
Winchell Lighting, Inc. HBS Case 9-187-074. This case documents how a midsize lighting company tracks
it marketing costs, as well as unit costs and allocated costs, to more fully understand its profitability.
Teaching Note: 5-192-034. Supplement: 9-187-075.
Direct Product Profitability at Hannaford Brothers Co. HBS Case 9-591-002. Concerns the pioneering
use of a method of accounting in retailing which takes into account not only sales and the cost of goods sold
but, at the item level, all of the variable costs associated with each item sold. This case focuses on the
strengths and weaknesses of Hannaford’s use of direct product profit and the opportunities for, and
obstacles hindering, improvement and extension of the direct product profit system.
Loading page 19...
Market-Based Management
Sixth Edition – 12 –
Instructor’s Manual – Chapter 2
The Customer Pyramid. HBS Case CRM 211. This reading provides students with an insight into different
levels of customer profitability. “The Customer Pyramid” provides a marketing management tool that
strengthens the link between service quality and profitability. 26 pages.
Market-Based Strategic Thinking
1. How could marketing metrics help General Motors turn around its decline in sales and profits?
GM has many internal performance metrics with regard to production, employee productivity, and financial
performance. Metrics for these categories are standard for manufacturing companies. The importance of
marketing metrics rests in their external measurements of performance. Ratings of customer satisfaction,
intentions to repurchase, brand preference, and customer complaints provide an external scorecard for
assessing current performance. Many of these marketing metrics are forward-looking metrics that help
forecast future performance. For example, declining customer satisfaction and decreasing intentions to
purchase GM vehicles in the future would signal a serious problem ahead. Likewise, improvements in
these marketing metrics would signal the potential for a bright future.
2. If a company dominates a market the way Microsoft, Google, and Intel dominate their markets, why
should that company bother to track marketing metrics?
All market leaders stumble at some point. U.S. Steel, GM, and IBM all seemed invincible at one time.
Without external marketing metrics, a company is vulnerable to listening to itself and not the voice of the
customer. Customer complaints, shifting customer preferences, customer satisfaction, and intentions to
repurchase are valuable external barometers that can warn a company before declines in sales and profits
occur. A company could have many captive customers, unhappy but with no place to go. When presented
an opportunity to buy elsewhere, however, these dissatisfied captive customers will exit en masse.
3. How would marketing metrics help a company like McDonald’s better manage its profitability?
By measuring the net marketing contribution, marketing ROI, and marketing ROS of each of its
restaurants, McDonald’s could better understand average performance as well as above- and below-
average performance. A portfolio performance analysis could be performed, similar to Figure 2-17, to show
the overall company average and all stores in different regions, and the average performance for different
regions. Other marketing metrics like complaint behavior and customer satisfaction scores could be tied to
these marketing profitability metrics to further illuminate and help improve the company’s performance.
4. How would Toyota use forward-looking marketing metrics to better understand future sales and
profits in the U.S. market?
Changes in customer satisfaction, and particularly changes in the percentage of “very satisfied” customers,
along with measurements of intentions to repurchase, provide external metrics of company performance
that shape future sales and profit performance. These forward-looking marketing metrics provide early
warning signs of problems, but they can also be encouraging signs when the metrics are improving.
5. How could a Wall Street analyst benefit from access to a company’s marketing metrics for a
company like BioTronics?
Wall Street analysts could benefit from measuring a company’s marketing ROI and marketing ROS.
Improvements or declines in these marketing profitability metrics provide a measure of company
performance in addition to the company’s internal financial metrics. If the difference between marketing
ROS and operating income as a percentage of sales is abnormally high, it would indicate excess company
overhead. Analysts could benchmark a company against publically traded peers, as in Figure 2-23, and
they could also benchmark company performance against Fortune 500 companies, as in Figure 2-24.
6. Why are most financial metrics backward-looking metrics?
Financial metrics like sales, percent gross margin, operating income, earnings per share, and all return
measures, such as ROS, ROA, ROE, ROC, are measured at the end of a financial accounting period. They
are a measure of what happened, not what is happening or could happen in the future. They are by
definition backward-looking performance metrics.
Sixth Edition – 12 –
Instructor’s Manual – Chapter 2
The Customer Pyramid. HBS Case CRM 211. This reading provides students with an insight into different
levels of customer profitability. “The Customer Pyramid” provides a marketing management tool that
strengthens the link between service quality and profitability. 26 pages.
Market-Based Strategic Thinking
1. How could marketing metrics help General Motors turn around its decline in sales and profits?
GM has many internal performance metrics with regard to production, employee productivity, and financial
performance. Metrics for these categories are standard for manufacturing companies. The importance of
marketing metrics rests in their external measurements of performance. Ratings of customer satisfaction,
intentions to repurchase, brand preference, and customer complaints provide an external scorecard for
assessing current performance. Many of these marketing metrics are forward-looking metrics that help
forecast future performance. For example, declining customer satisfaction and decreasing intentions to
purchase GM vehicles in the future would signal a serious problem ahead. Likewise, improvements in
these marketing metrics would signal the potential for a bright future.
2. If a company dominates a market the way Microsoft, Google, and Intel dominate their markets, why
should that company bother to track marketing metrics?
All market leaders stumble at some point. U.S. Steel, GM, and IBM all seemed invincible at one time.
Without external marketing metrics, a company is vulnerable to listening to itself and not the voice of the
customer. Customer complaints, shifting customer preferences, customer satisfaction, and intentions to
repurchase are valuable external barometers that can warn a company before declines in sales and profits
occur. A company could have many captive customers, unhappy but with no place to go. When presented
an opportunity to buy elsewhere, however, these dissatisfied captive customers will exit en masse.
3. How would marketing metrics help a company like McDonald’s better manage its profitability?
By measuring the net marketing contribution, marketing ROI, and marketing ROS of each of its
restaurants, McDonald’s could better understand average performance as well as above- and below-
average performance. A portfolio performance analysis could be performed, similar to Figure 2-17, to show
the overall company average and all stores in different regions, and the average performance for different
regions. Other marketing metrics like complaint behavior and customer satisfaction scores could be tied to
these marketing profitability metrics to further illuminate and help improve the company’s performance.
4. How would Toyota use forward-looking marketing metrics to better understand future sales and
profits in the U.S. market?
Changes in customer satisfaction, and particularly changes in the percentage of “very satisfied” customers,
along with measurements of intentions to repurchase, provide external metrics of company performance
that shape future sales and profit performance. These forward-looking marketing metrics provide early
warning signs of problems, but they can also be encouraging signs when the metrics are improving.
5. How could a Wall Street analyst benefit from access to a company’s marketing metrics for a
company like BioTronics?
Wall Street analysts could benefit from measuring a company’s marketing ROI and marketing ROS.
Improvements or declines in these marketing profitability metrics provide a measure of company
performance in addition to the company’s internal financial metrics. If the difference between marketing
ROS and operating income as a percentage of sales is abnormally high, it would indicate excess company
overhead. Analysts could benchmark a company against publically traded peers, as in Figure 2-23, and
they could also benchmark company performance against Fortune 500 companies, as in Figure 2-24.
6. Why are most financial metrics backward-looking metrics?
Financial metrics like sales, percent gross margin, operating income, earnings per share, and all return
measures, such as ROS, ROA, ROE, ROC, are measured at the end of a financial accounting period. They
are a measure of what happened, not what is happening or could happen in the future. They are by
definition backward-looking performance metrics.
Loading page 20...
Market-Based Management
Sixth Edition – 13 –
Instructor’s Manual – Chapter 2
7. Why would chief financial officers and senior management be comfortable with net marketing
contribution as a financial measure of marketing profitability?
CFOs and senior managers can easily see that the net marketing contribution is a financial metric derived
from company accounting information. The one additional step needed is to separate marketing and sales
expenses from sales, general, and administrative expenses. Some companies, though, already separate
the expenses in their reporting, as shown in Figure 2-12. With this information, we need to only add two
lines to the company income statement, as in Figure 2-9. There are no assumptions and no need to collect
additional information. We now have a financial-performance-derived measure of the contribution made by
the company’s investment in marketing and sales. Of course, for comparison, separate net marketing
contributions can also be figured for the company’s product lines or markets, or for the businesses,
divisions, or regions within the company.
8. Compute Apple’s net marketing contribution for company’s last fiscal year and add it to Figure 2-22.
Then explain how this level of net marketing contribution could be used in Apple’s marketing plans
to project Apple’s operating income for the current year.
9. How would Vizio use net marketing contribution at the market level to increase its knowledge of the
U.S. flat-panel television market?
Net marketing contribution is sales times percent margin minus marketing and sales expenses. There are
several markets for flat-panel televisions in the U.S., including consumer households, corporations (trade
shows and lobbies), restaurants and bars, heath care facilities (monitors), and airports (gate information).
Each market has a net marketing contribution based on sales, percent margin, and the investment in
marketing and sales expenses. The NMCs of each market would tell Vizio the marketing profits of the
markets. Computing the marketing ROI and marketing ROS for each would make it easy for the company
to compare the markets with regard to marketing cost efficiency and profit impact.
10. How would Procter & Gamble use a product-level measure of net marketing contribution for the
Tide brand in the U.S. market?
Tide is but one of nine brands in P&G’s detergent product line. The others are Bold, Cascade, Cheer,
Dash, Dawn, Dreft, ERA, and Gain. Each has a net marketing contribution based on sales, percent margin,
and marketing and sales expenses. Computing the NMC for each brand allows P&G to see which ones
contribute the most marketing profits to the product line and how much any one brand, such as Tide,
contributes to marketing profits. Creating a marketing profitability portfolio, as in Figure 2-17 (marketing
ROI versus marketing ROS), showing the product line average, the company average, and each brand’s
performance, would give P&G a clear understanding of the relative performance of each brand.
Shown above are Apple’s 2010 financial
results. The net marketing contribution of
$22.58 billion is based on estimated
marketing and sales expenses of $4.16
billion. Apple’s operating income in 2010
was $18.82 billion.
In the graph we can see how Apple’s net
marketing contribution went through the
roof in 2010. And, as shown, the pattern
established between the net marketing
contribution and operating income during
the previous 10 years stays intact.
Sixth Edition – 13 –
Instructor’s Manual – Chapter 2
7. Why would chief financial officers and senior management be comfortable with net marketing
contribution as a financial measure of marketing profitability?
CFOs and senior managers can easily see that the net marketing contribution is a financial metric derived
from company accounting information. The one additional step needed is to separate marketing and sales
expenses from sales, general, and administrative expenses. Some companies, though, already separate
the expenses in their reporting, as shown in Figure 2-12. With this information, we need to only add two
lines to the company income statement, as in Figure 2-9. There are no assumptions and no need to collect
additional information. We now have a financial-performance-derived measure of the contribution made by
the company’s investment in marketing and sales. Of course, for comparison, separate net marketing
contributions can also be figured for the company’s product lines or markets, or for the businesses,
divisions, or regions within the company.
8. Compute Apple’s net marketing contribution for company’s last fiscal year and add it to Figure 2-22.
Then explain how this level of net marketing contribution could be used in Apple’s marketing plans
to project Apple’s operating income for the current year.
9. How would Vizio use net marketing contribution at the market level to increase its knowledge of the
U.S. flat-panel television market?
Net marketing contribution is sales times percent margin minus marketing and sales expenses. There are
several markets for flat-panel televisions in the U.S., including consumer households, corporations (trade
shows and lobbies), restaurants and bars, heath care facilities (monitors), and airports (gate information).
Each market has a net marketing contribution based on sales, percent margin, and the investment in
marketing and sales expenses. The NMCs of each market would tell Vizio the marketing profits of the
markets. Computing the marketing ROI and marketing ROS for each would make it easy for the company
to compare the markets with regard to marketing cost efficiency and profit impact.
10. How would Procter & Gamble use a product-level measure of net marketing contribution for the
Tide brand in the U.S. market?
Tide is but one of nine brands in P&G’s detergent product line. The others are Bold, Cascade, Cheer,
Dash, Dawn, Dreft, ERA, and Gain. Each has a net marketing contribution based on sales, percent margin,
and marketing and sales expenses. Computing the NMC for each brand allows P&G to see which ones
contribute the most marketing profits to the product line and how much any one brand, such as Tide,
contributes to marketing profits. Creating a marketing profitability portfolio, as in Figure 2-17 (marketing
ROI versus marketing ROS), showing the product line average, the company average, and each brand’s
performance, would give P&G a clear understanding of the relative performance of each brand.
Shown above are Apple’s 2010 financial
results. The net marketing contribution of
$22.58 billion is based on estimated
marketing and sales expenses of $4.16
billion. Apple’s operating income in 2010
was $18.82 billion.
In the graph we can see how Apple’s net
marketing contribution went through the
roof in 2010. And, as shown, the pattern
established between the net marketing
contribution and operating income during
the previous 10 years stays intact.
Loading page 21...
Market-Based Management
Sixth Edition – 14 –
Instructor’s Manual – Chapter 2
11. How could Apple’s chief marketing officer use Figure 2-23 to explain to Apple’s CFO the value of
marketing ROS and marketing ROI as corporate performance metrics?
CFOs are interested in financial numbers. They are less impressed by survey data or the opinions of
marketing managers. Figure 2-23 is based on the financial results of Apple and four competing benchmark
companies. Both graphs show how marketing ROI and marketing ROS correspond to operating income.
Their relationship to operating income adds credibility to these two marketing profitability metrics.
Additionally, each graph demonstrates Apple’s superior performance with respect to its investment in
marketing and sales expenses.
12. Shown below are HP’s six major business segments and their percentages of sales for 2009. How
would a marketing profitability portfolio (similar to Figure 2-17) help the HP chief marketing officer
communicate to senior management the relative performance of each business segment when
compared to the HP average.
In 2009, HP as a company had a marketing ROS of 17 percent and a marketing ROI of about 200 percent
(see Figure 2-23). Each of HP’s six major business segments also has a marketing ROS and a marketing
ROI. Both may be easily computed from existing financial data and used to create a graph similar to Figure
2-17. This marketing profitability portfolio would show the HP average and the average of each business
segment, revealing which ones are bolstering the HP average and which ones are dragging it down.
13. In 2009, Netflix had a marketing ROI of 178 percent. What does this mean in terms of the company’s
investment in marketing and sales?
A marketing ROI of 178 percent means that for each dollar Netflix invested in marketing and sales to grow
the company, it produced $1.78 in net marketing contribution (after paying the $1 investment back). From
the net marketing contribution, Netflix deducts its general and administrative expenses and other overhead
to figure its operating income. If the company improved its marketing ROI to 200 percent, this would mean
it is producing $2 in net marketing contribution for every $1 it invested in marketing and sales expenses.
14. For any airline of interest, compute its 2010 marketing ROS, marketing ROI, and operating income
(as a percentage of sales) using the airline’s 2010 income statement in its annual report. Assume
marketing and sales expenses are 75 percent of SGA expenses. Then plot the results in Figure 2-24
and interpret the airline’s performance.
We have computed this information for three airlines. As shown in the table, the airlines’ operating incomes
as a percentage of sales varied with the airlines’ marketing ROS and marketing ROI. When compared to
the averages shown in Figure 2-24 for 2009, all three airlines were below average. Delta had the best
performance and US Air the worst.
15. Why would companies that sell energy and raw materials, such as ExxonMobil and Alcoa, have
very large marketing ROIs.
These companies have gross margins from about 18 to 39 percent, as shown in the table. But what makes
their marketing ROIs so high is their low level of marketing and sales expenses as a percentage of sales.
For both companies, the investment in marketing and sales is less than 3.5 percent of sales. This makes
the denominator of the marketing ROI equation small relative to Fortune 500 companies in other sectors.
Sixth Edition – 14 –
Instructor’s Manual – Chapter 2
11. How could Apple’s chief marketing officer use Figure 2-23 to explain to Apple’s CFO the value of
marketing ROS and marketing ROI as corporate performance metrics?
CFOs are interested in financial numbers. They are less impressed by survey data or the opinions of
marketing managers. Figure 2-23 is based on the financial results of Apple and four competing benchmark
companies. Both graphs show how marketing ROI and marketing ROS correspond to operating income.
Their relationship to operating income adds credibility to these two marketing profitability metrics.
Additionally, each graph demonstrates Apple’s superior performance with respect to its investment in
marketing and sales expenses.
12. Shown below are HP’s six major business segments and their percentages of sales for 2009. How
would a marketing profitability portfolio (similar to Figure 2-17) help the HP chief marketing officer
communicate to senior management the relative performance of each business segment when
compared to the HP average.
In 2009, HP as a company had a marketing ROS of 17 percent and a marketing ROI of about 200 percent
(see Figure 2-23). Each of HP’s six major business segments also has a marketing ROS and a marketing
ROI. Both may be easily computed from existing financial data and used to create a graph similar to Figure
2-17. This marketing profitability portfolio would show the HP average and the average of each business
segment, revealing which ones are bolstering the HP average and which ones are dragging it down.
13. In 2009, Netflix had a marketing ROI of 178 percent. What does this mean in terms of the company’s
investment in marketing and sales?
A marketing ROI of 178 percent means that for each dollar Netflix invested in marketing and sales to grow
the company, it produced $1.78 in net marketing contribution (after paying the $1 investment back). From
the net marketing contribution, Netflix deducts its general and administrative expenses and other overhead
to figure its operating income. If the company improved its marketing ROI to 200 percent, this would mean
it is producing $2 in net marketing contribution for every $1 it invested in marketing and sales expenses.
14. For any airline of interest, compute its 2010 marketing ROS, marketing ROI, and operating income
(as a percentage of sales) using the airline’s 2010 income statement in its annual report. Assume
marketing and sales expenses are 75 percent of SGA expenses. Then plot the results in Figure 2-24
and interpret the airline’s performance.
We have computed this information for three airlines. As shown in the table, the airlines’ operating incomes
as a percentage of sales varied with the airlines’ marketing ROS and marketing ROI. When compared to
the averages shown in Figure 2-24 for 2009, all three airlines were below average. Delta had the best
performance and US Air the worst.
15. Why would companies that sell energy and raw materials, such as ExxonMobil and Alcoa, have
very large marketing ROIs.
These companies have gross margins from about 18 to 39 percent, as shown in the table. But what makes
their marketing ROIs so high is their low level of marketing and sales expenses as a percentage of sales.
For both companies, the investment in marketing and sales is less than 3.5 percent of sales. This makes
the denominator of the marketing ROI equation small relative to Fortune 500 companies in other sectors.
Loading page 22...
Market-Based Management
Sixth Edition – 15 –
Instructor’s Manual – Chapter 2
Marketing Performance Tools and Application Exercises
2.1 Company-Level Net Marketing Contribution: Figure 2-15 is used with this marketing performance tool to
address analysis items A (next page) and B (page 19). The starting data are shown here to make
comparisons with the analysis items easy.
Sixth Edition – 15 –
Instructor’s Manual – Chapter 2
Marketing Performance Tools and Application Exercises
2.1 Company-Level Net Marketing Contribution: Figure 2-15 is used with this marketing performance tool to
address analysis items A (next page) and B (page 19). The starting data are shown here to make
comparisons with the analysis items easy.
Loading page 23...
Market-Based Management
Sixth Edition – 16 –
Instructor’s Manual – Chapter 2
A. Evaluate the profit impact of eliminating the casual shorts and knitted sweaters product lines.
Teaching Note: Sales drop by $25 million and the net marketing contribution drops by $3 million. More
importantly, net profit (before taxes) falls by 30 percent, from $10 million to $7 million. The point for
students to understand is that, as long as the market profit is positive, it is contributing to other fixed
costs and profits. The $20 million in operating expenses is not product related but represents overhead
expenses that will still occur without these two product lines. Then the operating expenses would have
to be covered by the remaining product lines.
Sixth Edition – 16 –
Instructor’s Manual – Chapter 2
A. Evaluate the profit impact of eliminating the casual shorts and knitted sweaters product lines.
Teaching Note: Sales drop by $25 million and the net marketing contribution drops by $3 million. More
importantly, net profit (before taxes) falls by 30 percent, from $10 million to $7 million. The point for
students to understand is that, as long as the market profit is positive, it is contributing to other fixed
costs and profits. The $20 million in operating expenses is not product related but represents overhead
expenses that will still occur without these two product lines. Then the operating expenses would have
to be covered by the remaining product lines.
Loading page 24...
Market-Based Management
Sixth Edition – 17 –
Instructor’s Manual – Chapter 2
B. What would be the profit impact of increasing market share from 2 to 3 percent for the casual shorts
product line if marketing and sales expenses were doubled ($1.5 million to $3 million)?
Teaching Note: While this strategy would produce $5.1 million more in sales, the net marketing con-
tribution would drop by $200,000. The gains in market share and sales are not enough at current
margins to offset a $1.5 million increase in marketing and sales expenses. As shown, this loss drops to
the bottom line where net profit (before taxes) also drops by $200,000. You could instruct students to
search for the market share needed to make this strategy equal the current net marketing contribution
(starting data). This exercise produces an interesting benchmark, as the needed market share would be
the minimum share level required to keep the strategy from adversely impacting net profit.
Sixth Edition – 17 –
Instructor’s Manual – Chapter 2
B. What would be the profit impact of increasing market share from 2 to 3 percent for the casual shorts
product line if marketing and sales expenses were doubled ($1.5 million to $3 million)?
Teaching Note: While this strategy would produce $5.1 million more in sales, the net marketing con-
tribution would drop by $200,000. The gains in market share and sales are not enough at current
margins to offset a $1.5 million increase in marketing and sales expenses. As shown, this loss drops to
the bottom line where net profit (before taxes) also drops by $200,000. You could instruct students to
search for the market share needed to make this strategy equal the current net marketing contribution
(starting data). This exercise produces an interesting benchmark, as the needed market share would be
the minimum share level required to keep the strategy from adversely impacting net profit.
Loading page 25...
Market-Based Management
Sixth Edition – 18 –
Instructor’s Manual – Chapter 2
2.2 Market-Level NMC, Marketing ROS, and Marketing ROI: Figure 2-18 is used with this marketing
performance tool to address analysis items A (next page) and B (page 22). The starting data are shown
here to make comparisons with the analysis items easy.
Sixth Edition – 18 –
Instructor’s Manual – Chapter 2
2.2 Market-Level NMC, Marketing ROS, and Marketing ROI: Figure 2-18 is used with this marketing
performance tool to address analysis items A (next page) and B (page 22). The starting data are shown
here to make comparisons with the analysis items easy.
Loading page 26...
Market-Based Management
Sixth Edition – 19 –
Instructor’s Manual – Chapter 2
A. Evaluate the profit impact of exiting the fashion segment.
Teaching Note: This would be a disastrous decision. Despite a low pretax net profit of $300,000, the
fashion segment generates $6.8 million in marketing profits. This amount covers the $6.5 million in
allocated operating expenses, which the business would have to pay regardless of whether it exits this
segment. While the strategy lowers the marketing budget by $6.5 million, the business’s overall net
profit would be reduced by $6.8 million, the exact amount of the current net marketing contribution for
the fashion segment.
Sixth Edition – 19 –
Instructor’s Manual – Chapter 2
A. Evaluate the profit impact of exiting the fashion segment.
Teaching Note: This would be a disastrous decision. Despite a low pretax net profit of $300,000, the
fashion segment generates $6.8 million in marketing profits. This amount covers the $6.5 million in
allocated operating expenses, which the business would have to pay regardless of whether it exits this
segment. While the strategy lowers the marketing budget by $6.5 million, the business’s overall net
profit would be reduced by $6.8 million, the exact amount of the current net marketing contribution for
the fashion segment.
Loading page 27...
Market-Based Management
Sixth Edition – 20 –
Instructor’s Manual – Chapter 2
B. In the fashion segment, how much market share would the business have to obtain to keep the same
level of marketing profits if the business doubled marketing and sales expenses in that segment?
Teaching Note: The current market share of 3.5 percent would have to increase to 5.2 percent to
maintain a net marketing contribution of $6.8 million when the marketing and sales budget is doubled to
$13 million. As shown, this level of market share also holds net profit at $10 million, while sales
increase by $18 million. These data provide a basis for a discussion around profitability and market
share. Is it reasonable to expect the business would gain 1.7 percent in market share if it doubles the
marketing and sales budget? Obviously, the larger the share gain needed to hold profits, the greater is
the risk of lower profits.
Sixth Edition – 20 –
Instructor’s Manual – Chapter 2
B. In the fashion segment, how much market share would the business have to obtain to keep the same
level of marketing profits if the business doubled marketing and sales expenses in that segment?
Teaching Note: The current market share of 3.5 percent would have to increase to 5.2 percent to
maintain a net marketing contribution of $6.8 million when the marketing and sales budget is doubled to
$13 million. As shown, this level of market share also holds net profit at $10 million, while sales
increase by $18 million. These data provide a basis for a discussion around profitability and market
share. Is it reasonable to expect the business would gain 1.7 percent in market share if it doubles the
marketing and sales budget? Obviously, the larger the share gain needed to hold profits, the greater is
the risk of lower profits.
Loading page 28...
Market-Based Management
Sixth Edition – 21 –
Instructor’s Manual – Chapter 2
2.3 Company Net Marketing Contribution and Marketing ROI: Figure 2-13 is used with this marketing
performance tool to address items A and B (below) and C (next page).
A. For a company of interest, obtain the required input from a company annual report. Evaluate the
company’s marketing profitability and how it contributes to net profit before taxes.
Teaching Note: If students obtain their company data off the Internet, they will probably have to use
SGA expenses (sales, general, and administrative expenses), as most companies do not report
marketing and sales expenses separately. Because SGA expenses include other expenses, I
recommend using 75 percent of SGA expenses as an approximation of the marketing and sales
expenses.
B. How would marketing profits and net profit change if sales increased by 25 percent?
Teaching Note: For the data presented above, when sales are increased 25 percent with no other
changes, profits and marketing profitability metrics all improve. If we also increase marketing and sales
expenses by 25 percent, profits still go up but the marketing profitability metrics (marketing ROS and
marketing ROI) stay the same. A good point for discussion is, “How much should the marketing and
sales expenses increase to achieve a 25 percent gain in sales?” There is no right or wrong answer,
except something has to change to account for the increase in sales, even in a market growing at 25
percent annually.
Sixth Edition – 21 –
Instructor’s Manual – Chapter 2
2.3 Company Net Marketing Contribution and Marketing ROI: Figure 2-13 is used with this marketing
performance tool to address items A and B (below) and C (next page).
A. For a company of interest, obtain the required input from a company annual report. Evaluate the
company’s marketing profitability and how it contributes to net profit before taxes.
Teaching Note: If students obtain their company data off the Internet, they will probably have to use
SGA expenses (sales, general, and administrative expenses), as most companies do not report
marketing and sales expenses separately. Because SGA expenses include other expenses, I
recommend using 75 percent of SGA expenses as an approximation of the marketing and sales
expenses.
B. How would marketing profits and net profit change if sales increased by 25 percent?
Teaching Note: For the data presented above, when sales are increased 25 percent with no other
changes, profits and marketing profitability metrics all improve. If we also increase marketing and sales
expenses by 25 percent, profits still go up but the marketing profitability metrics (marketing ROS and
marketing ROI) stay the same. A good point for discussion is, “How much should the marketing and
sales expenses increase to achieve a 25 percent gain in sales?” There is no right or wrong answer,
except something has to change to account for the increase in sales, even in a market growing at 25
percent annually.
Loading page 29...
Market-Based Management
Sixth Edition – 22 –
Instructor’s Manual – Chapter 2
C. Evaluate the profit impact of a strategy in which the percent margin is increased by 5 points and
marketing and sales expenses are increased by 2 percentage points.
Teaching Note: As shown, this strategy produces an increase of $3.375 million in the net marketing
contribution. An additional assignment would be to instruct students to find the level of percent margin
that would yield no increase in the net marketing contribution while still spending the extra 2 percent on
marketing and sales. This occurs at 40.8 percent. If the company cannot increase its margins beyond
40.8 percent, it will see no increase in marketing profits. You can use this variation on the assignment
to start a discussion around the risk of such a strategy.
Sixth Edition – 22 –
Instructor’s Manual – Chapter 2
C. Evaluate the profit impact of a strategy in which the percent margin is increased by 5 points and
marketing and sales expenses are increased by 2 percentage points.
Teaching Note: As shown, this strategy produces an increase of $3.375 million in the net marketing
contribution. An additional assignment would be to instruct students to find the level of percent margin
that would yield no increase in the net marketing contribution while still spending the extra 2 percent on
marketing and sales. This occurs at 40.8 percent. If the company cannot increase its margins beyond
40.8 percent, it will see no increase in marketing profits. You can use this variation on the assignment
to start a discussion around the risk of such a strategy.
Loading page 30...
Market-Based Management
Sixth Edition – 23 –
Instructor’s Manual – Chapter 2
2.4 Benchmarking Marketing ROI versus Operating Income as a Percentage of Sales: Figure 2-23 is
used with this marketing performance tool to create the data needed to address items A (below) and B
(next page).
A. For a company of interest, go online and obtain the operating income and the data needed to estimate
the company’s marketing ROI. You will probably need to use 75 percent of SGA expenses as your
estimate of marketing and sales expenses, because companies rarely report marketing and sales
expenses separately in their financial statements.
Teaching Note: I recommend using the following keywords to search for a company income statement:
Google Keywords: Company Name Year Income Statement Forbes
Example: General Motors 2011 Income Statement Forbes
In this example, we used General Motors’ 2011 Income Statement for the company focus and for the
data shown above under “GM 2011.”
Sixth Edition – 23 –
Instructor’s Manual – Chapter 2
2.4 Benchmarking Marketing ROI versus Operating Income as a Percentage of Sales: Figure 2-23 is
used with this marketing performance tool to create the data needed to address items A (below) and B
(next page).
A. For a company of interest, go online and obtain the operating income and the data needed to estimate
the company’s marketing ROI. You will probably need to use 75 percent of SGA expenses as your
estimate of marketing and sales expenses, because companies rarely report marketing and sales
expenses separately in their financial statements.
Teaching Note: I recommend using the following keywords to search for a company income statement:
Google Keywords: Company Name Year Income Statement Forbes
Example: General Motors 2011 Income Statement Forbes
In this example, we used General Motors’ 2011 Income Statement for the company focus and for the
data shown above under “GM 2011.”
Loading page 31...
28 more pages available. Scroll down to load them.
Preview Mode
Sign in to access the full document!
100%
Study Now!
XY-Copilot AI
Unlimited Access
Secure Payment
Instant Access
24/7 Support
AI Assistant
Document Details
Subject
Marketing