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D1: When a Project Gets Risky

This activity will provide you with an opportunity to engage in discussion on a project management topic that was covered in this module. The class interaction will foster a learning environment in which you will learn from each other’s experiences and opinions. In addition, you will practice using the project management jargon and expressing your opinions in a professional manner. The options available in this discussion have ethical considerations that are important to consider as a project manager.

Risk is a part of every business and project. Identifying and eliminating as much risk as possible are the duties of the project manager. Maintaining change/version control documents to validate changes in project scope is essential to ensure that the project will be paid for and the customer will accept the project upon completion.

Respond to the following:

You are the project manager for a new restaurant. The project includes construction of the physical building, equipping the kitchen to commercial standards, and ensuring that the kitchen has all essential elements and may be safely used to produce cuisine for customers. As the project progresses, you identify several areas with increased risk and approach the customer with suggestions for addressing the new risk. One area of concern is the change of management at a supplier. Historically, you have done business with AAA Concrete and the husband and wife owners, Marvin and Betty. Unfortunately, they have decided to retire and have turned the business over to their three children. You have heard rumors that the children do not offer the same quality materials as their parents, which could pose a significant problem given that the restaurant will have a large concrete balcony for alfresco (fresh air) dining. Would this be considered a risk to the project? Why or why not? What, if anything, should you do as the project manager?

One of the employees on the project has been approached by someone they know about purchasing a second-hand (used) commercial freezer and oven. The savings could be significant (around $50,000) compared to purchasing the new items. What should you as the project manager do in this situation? What support do you have for that decision? Does the availability of used appliances pose risk to the project? If accepted, would a change document be necessary? Justify your answer.

Provide a third scenario relating to risk. How would you handle the new instance as project manager? Please provide details.

Consult the Discussion Posting Guide for information about writing your discussion posts. It is recommended that you write your post in a document first. Check your work and correct any spelling or grammatical errors. When you are ready to make your initial post, click on the “Reply”. Then copy/paste the text into the message field, and click “Post Reply.” 

To respond to a peer, click “Reply” beneath her or his post and continue as with an initial post.

Evaluation

This discussion will be graded using the discussion board rubric. Please review this rubric, located on the Rubrics page within the Start Here module of the course, prior to beginning your work to ensure your participation meets the criteria in place for this discussion. All discussions combined are worth 15% of your final course grade.

D1 Return on Marketing Investment: Pizza Hut Korea’s Case

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INSTRUCTIONS

When preparing for your discussion post on this case, it is recommended that you read through it several times.

Read through it the first time to familiarize yourself with the prompt.

On the second reading, consider your assigned role in the situation, and let that guide your perspective.

Look deeper at the details: facts, problems, organizational goals, objectives, policies, strategies.

Next, consider the concepts, theories, tools and research you need to use to address the issues presented.

Then, complete any research, analysis, calculations, or graphing to support your decisions and make recommendations.

BACKGROUND

Pizza Hut Korea was a successful business for almost 15 years, until it experienced a decline between 2000 and 2008. With the hiring of a new CEO, the company has shown a turnaround, using the Return on Marketing Investment (ROMI) tool. This case study focuses on how the use of marketing performance analytics helped Pizza Hut Korea establish a disciplined decision making process for selecting and evaluating marketing campaign investments. (Lee & Yoo, 2013, p. 1662).

PROMPT

Read the Case Study Return on Marketing Investment: Pizza Hut Korea’s Case

 (Links to an external site.)

 and review the module resources. Answer the questions about the case study. Make sure to support your answers with relevant scholarly resources.

Tasks:

In the discussion forum, answer the following:

How can calculating Customer Lifetime Value (CLV) drive determinations of worthwhile marketing investments?

Justify the importance of using the ROMI tool to predict marketing performance.

In response to your peers, do you agree with their justification of the importance of the ROMI tool? What key elements should, or should not, be included in their justification?

Support your answers using relevant, scholarly resources and citations in APA format.

Responses should comprise 200-600 words.

References

Lee, S. & Yoo, S. (2012). Return on Marketing Investment: Pizza Hut Korea’s Case

 (Links to an external site.)

.

Consult the Discussion Posting Guide for information about writing your discussion posts. It is recommended that you write your post in a document first. Check your work and correct any spelling or grammatical errors. When you are ready to make your initial post, click on the “Reply”. Then copy/paste the text into the message field, and click “Post Reply.” 

To respond to a peer, click “Reply” beneath her or his post and continue as with an initial post.

Evaluation

This discussion will be graded using the discussion board rubric. Please review this rubric, located on the Rubrics page within the Start Here module of the course, prior to beginning your work to ensure your participation meets the criteria in place for this discussion. All discussions combined are worth 20% of your final course grade.

Return on marketing investment:
Pizza Hut Korea’s case

Sungil Lee
Seoul School of Integrated Science and Technologies, Seoul, Korea and

Pizza Hut Korea, Seoul, Korea, and

Shijin Yoo
Korea University Business School, Seoul, Korea

Abstract

Purpose – The purpose of this paper is twofold – the first is to explore the key actions that enabled
Pizza Hut Korea (PHK) to come out of a nine-year decline in sales and profits. The second purpose is to
delve deeper into the concept of return on marketing as applied to the turnaround of Pizza Hut Korea,
using customer lifetime value (LTV) and the related return on marketing investment (ROMI) principles
that were instrumental in turning around the business.

Design/methodology/approach – The main method used is interviews with company senior
management, reviews of internal company data as well as external data and literature reviews of
existing theories on return on marketing. The case uses a specific promotional decision that senior
management must make to review the decision methodologies using return on marketing. This
quantified return estimate is then combined with marketing and business strategic considerations to
review the decision that management should make regarding the promotion. In addition, the detailed
executive interviews shed light on the approaches taken by the senior management to effect a change
in culture as well as the disciplined business reviews that were put in place to improve the financial
performance. Finally the case describes the marketing insights that led the firm to implement their
consumer promotions to help turn the business around.

Findings – Turning around a business that has been in decline for a long time requires not just keen
consumer insight and excellent marketing tactics, it is a combination of changing the culture of the
company and mindset of the leaders along with instilling disciplined financial processes and driving
consumer insight driven strategies. In particular, this study focuses on the role of quantified marketing
investment return model that helped to drive a fact-based, data-driven decision-making process that,
combined with strategic insight, helped to turn the business around. The lifetime value and return on
marketing investment model employed by Pizza Hut Korea provides a starting framework for
analyzing marketing investment returns that can be adapted by many other companies.

Originality/value – Though there has been research conducted in many turnaround situations,
there has been virtually no work done to examine the turnaround strategies employed using key
marketing return metrics. In addition, the study provides value in that it examines the totality of
management principles employed (cultural, organizational, financial, marketing) to drive innovation
and change. This study will be useful for those that seek to better understand the key principles
involved in turning around a business but with particular emphasis on quantified marketing returns
analysis using return on marketing investment method.

Keywords Marketing strategy, Promotions, Customer lifetime value, Return on marketing investment,
Catering industry, South Korea

Paper type Case study

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0025-1747.htm

Because this case deals with an ongoing business situation with Pizza Hut Korea, some data have
been omitted or modified for confidentiality reasons.

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Management Decision
Vol. 50 No. 9, 2012

pp. 1661-1685
q Emerald Group Publishing Limited

0025-1747
DOI 10.1108/00251741211266741

Introduction
One of the biggest frustrations facing marketers and CEO’s of companies is the inability
to quantify the effectiveness of marketing spending. Executives understand and accept
that the company’s products and services need to be advertised and promoted in order to
generate sales. The issue is what is the appropriate amount to spend and how does one
determine whether the returns justify the spending? Because of the inability of marketers
to quantify the benefits of the marketing budget, this is the first item to be cut near the
end of the fiscal year when the company has difficulty meeting its profit objectives. The
marketers have a difficult time justifying why the budget should not be cut as they
cannot demonstrate, in quantifiable terms, what is the exact loss to the company as a
result of the budget cut. In particular, this problem is exacerbated if the company is
undergoing declining sales and profits. When a firm is not performing well, the senior
executives try to protect the bottom line by cutting variable expenses first – with
marketing budgets invariably becoming the first target. The immediate impact is not
visible and other expenses, such as people, are much more difficult to reduce quickly.

Not much research has been done that have used specific examples of marketing
performance measurement in a turnaround situation. This paper attempts to address
this issue by looking at the paper of Pizza Hut Korea. Pizza Hut Korea had been a
successful business from its introduction in 1985 to the early 2000s. Since then, it has
experienced declining sales and loss of customers. A new CEO has joined the company
in early 2008 and has implemented many changes to turn the business around,
including a disciplined marketing performance measurement tool called Return On
Marketing Investment (ROMI). This paper uses interviews with company senior
executives, internal data covering sales and performance information as well as
extensive consumer research data, and external data to compile a perspective on the
relationship of marketing performance measurement and its role in helping to turn
around a declining business (Pizza Hut Korea, 2002-2011, 2011).

A detailed analysis of the methodology used by Pizza Hut Korea to calculate Customer
Lifetime Value (CLV) is reviewed, as this is the first step to calculating the Return On
Marketing Investment. The approaches taken by the senior management to address the
organizational issues and how that relates to the quantified marketing performance
measurement techniques used is explained. There is detailed discussion of the initiatives
taken by management to turn around the business including mindset shift, various
marketing initiatives to drive value and improve taste perception as well as make all of
the management much more financially accountable. The role of how a quantified
marketing performance measurement tool has helped to drive more insight and fact
driven decision making and its importance in turning around the business is explored.

The objective of this paper is to provide a forum to begin to think more
quantitatively about how we measure the impact of marketing spend to help improve
business performance. The hope is that this will spur more research covering other
methodologies and industries in order to continue to improve our understanding of
marketing performance measurement.

Situation summary
In June of 2011, President S of Pizza Hut Korea (PHK), was pondering his next move.
He was tired from two and a half years of relentless focus on trying to turn around the
declining trend of Pizza Hut. At the same time, President S was excited because he was

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finally beginning to see the fruits of the efforts of the past two and a half years in
business performance. As President S reviewed the latest financial statements for the
month of June, he was wondering how far he could take the business to achieving the
former glory of the once high flying Pizza Hut brand in Korea.

President S was hired in early 2008 to turn around the flagging sales and profitability
of PHK. The business had undergone a steady decline in customers and transactions
since 2002. Competitors had taken a significant amount of share from Pizza Hut and were
building strong brands at the expense of Pizza Hut. The pizza industry in Korea seemed
to have reached saturation point and there was intense competition for market share in a
slow growing category – hence negatively affecting profitability.

Marketing Director Y and Operations Director J had asked to meet with President S
to discuss the pending promotional plan for August. The current promotional plan for
August was a series of promotional tie-ins with partner companies offering various
incentives and discounts to drive sales of their premium line of pizzas. President S did
not feel the promotional ideas sufficiently leveraged the current success of their new
pizza, “The Special” and may not be enough to continue the positive momentum. The
Special, after its launch in May, had achieved outstanding positive sales performance
in May for the delivery channel, which accounted for 55 percent of the business.
However, in July, competitors were expected to respond with aggressive pricing as well
as launch new premium pizzas with heavy TV advertising support, outspending Pizza
Hut by two to one on media. As a result, it was felt that July sales would be slow and
that Pizza Hut would need to be more aggressive in August in order to continue the
positive momentum during the peak summer holiday season.

President S had asked the two directors to re-review the existing promotional plan
for August as the President felt it was not strong enough. In particular, the President
asked the two directors to consider a value oriented “Pair Deal” promotion where a
significant discount would be given if a customer ordered two pizzas instead of the
usual one pizza. The Special was a range of five pizza toppings on top of a dough that
was soft yet chewy as well as being less oily. Feedback from customers was that they
tried The Special because of the low price (15,900 Korean won (won, hereafter)[1] for
one versus the normal price of about 25,000 won for a typical pizza from Pizza Hut) but
came back because of the great taste of the pizza. Consumers commented favorably on
the great taste of the dough as well as the quality and taste of the various toppings.

Marketing Director Y said that the Directors could not agree on whether to proceed
with the Pair Deal promotion for August. She said both directors had different opinions
and their staff were also split as to whether to proceed with the Pair Deal promotion.
She said her recommendation was to not proceed with the Pair Deal promotion.
Marketing Director Y stated her arguments as follows:

My marketing team are split evenly on whether to proceed with the Pair Deal promotion in
August. The supporters say that this is our chance to get as many consumers as possible to
try our great new taste and that we should be very aggressive with price to get customers to
try the product as they will become repeat customers based on the excellent taste of the
product. The opponents argue that the product is already attractively priced at 15,900 won
per pizza (versus the usual price of 25,000 won for the same sized premium pizza) and that by
discounting it further through a Pair Deal (2 for 25,000 won), we will hurt the value and image
of the brand unnecessarily. After listening to both sides of the argument, I am recommending
that we not proceed with the Pair Deal due to concern on brand image.

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Operations Director J was in favor of running the Pair Deal promotion. He stated his
position with the following arguments:

My operations managers are also split evenly on whether to run this promotion or not. There
are merits to both sides of the argument. However, I have come to the conclusion that it is
better to proceed with this promotion. Under normal circumstances, I would not recommend
we proceed. However, the key difference here is the fantastic quality of the product and the
great response we are having from our consumers. They love the taste of the new dough. If
the product did not perform as well as it does now, I would be reluctant to run such an
aggressive promotion during our traditionally strongest month of the year. But because the
product tastes so good, I don‘t believe consumers will form a negative image based on the low
price. Once they try The Special, I think consumers will be hooked and become loyal.
Therefore, I believe we should aggressively promote The Special in order to attract new users
and make them loyal Pizza Hut customers.

President S saw merit in both points-of-view and said he wanted each director to think
further about the arguments each side has made. In particular, he wanted the two directors
to first calculate the quantified return on marketing investment (ROMI) of running the Pair
Deal promotion and then to make a recommendation based on both the ROMI data and
strategic considerations. He asked them to also take into account other strategic factors,
such as the consumer research findings and potential competitive responses.

Business overview
The business in June of 2011 had achieved the highest profit in both dollars and
margins in the last five years. Same Store Transaction Growth (SSTG – Transaction
growth versus year ago for stores open during the last year), a key indicator of
business health, was on the increase for the first time in nine years. Moreover,
consumer satisfaction with The Special was very high and repeat purchase intent was
extremely high. The strategy to better understand key consumer insights that were
driving existing Pizza Hut customers away seemed to be working and consumers that
had abandoned Pizza Hut for competitors were beginning to show signs of returning.
However, future prospects for the return to the “glory days” of high growth and profits
were not looking good. The growth rate of both the Western dining market and pizza
category had slowed to a crawl over the last several years and future prospects for
healthy growth was not promising.

Faced with these challenges, President S pondered his next move. He realized that of
the various key success factors in turning around the business, he needed to focus even
more on clearly understanding and identifying the key variables that are critical to
attracting and retaining customers. He needed to have a clear idea of the role that price
plays in driving additional customer traffic to stores and what the key factors are that
will lead to long-term growth for Pizza Hut.

Pizza market in Korea
Pizza market
The overall Pizza category in Korea is over-penetrated as of 2010. Based on comparison
data of pizza restaurant units per capita, Korea ranks the highest among countries with
similar economic development (Figure 1). Korea has 28 pizza restaurant units per
million people, the highest in the list of countries with similar or higher GDP per capita.
Hong Kong is 3rd with 23 units, and Singapore is in 4th place with 15 units.

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Competitive situation
The total pizza market in Korea is estimated to be Won 1,200 trillion won in 2010. The
majority of the category is dominated by the 3 premium brands of Pizza Hut, Mr Pizza
and Domino’s Pizza that is estimated to have 76 percent market share. The leading
pizza brands are priced roughly on par, while the next tier brands (Papa Johns and
Pizza Ettang) are priced about 10-20 percent below the premium brands. The other
brands are primarily Mom and Pop pizza brands that provide take-out pizza at 40-50
percent below the premium pizza prices. This is summarized in Figure 2.

Pizza Hut was the first premium pizza brand to launch in Korea in 1985 followed by
Dominos and Mr Pizza in 1990. Both Dominos and Mr Pizza follow the franchise model
while Pizza Hut has a mixture of company owned (equity) stores and franchise stores.
Dominos competes only in the delivery category, while Mr Pizza competes in both Dine
In and Delivery segment with Pizza Hut.

Mr Pizza is the only premium Korean brand and it initially copied many elements of
Pizza Hut’s strategy, including the products, store design, layout, operations standards
and marketing strategy. However, it was not until the early 2000s that Mr Pizza began
to make serious market share inroads by positioning their brand squarely at the main
western dining user of young women in their 20s. They adopted the slogan “Mr Pizza
– for Women” and hired a local female celebrity to be their spokesperson on their TV

Figure 1.
Pizza category in Korea is

over-penetrated

Figure 2.
Korea total pizza market

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commercials (TVCs). They also introduced more toppings geared toward young
women (especially seafood toppings) and ran many women-oriented promotions and
discount offers. Such a strong, young women focused strategy made sense for Mr Pizza
since the vast majority of decision makers for western dining are young women in their
20s. Due to the success of this young women oriented strategy, Mr Pizza grew rapidly
and by mid-2010, they had 390 restaurants in the country.

Dominos Korea has focused on the delivery business, consistent with their global
strategy. They are run by a master franchisee that deals with the local franchisees and
supports the franchisees with new products, IT support, marketing, R&D and supply
chain logistics. By mid-2010, Dominos had 340 stores in the country.

Pizza Etang and Papa Johns are the non-premium delivery brands while the local
mom and pop stores mainly provide only pick-up service. The mom and pop stores go
after the neighborhood consumers and students who want cheap, filling pizza while
Pizza Etang and Papa Johns are positioned in-between the premium and mom and pop
pizza stores.

Rise and fall of Pizza Hut Korea
Early keys to success
Pizza Hut is part of Yum! Brands (YUM), a listed company on the New York Stock
Exchange. YUM’s portfolio of restaurants includes KFC and Taco Bell in addition to
Pizza Hut. As of the end of 2009, YUM has over 40,000 restaurants in 110 countries and
over 1 million employees with sales of $9.4 billion. The company is the leading brand in
restaurants with the vision of “Building the Defining Global Company That Feeds the
World.”

Pizza Hut entered Korea in early 1985 with the first store in Itaewon. It was initially
started as a joint venture with Seong Shin Jae as the local partner having 49 percent
equity and the parent company (Pepsi-Cola Company) holding 51 percent. At that time,
there were almost no Western dining restaurants in Korea and Pizza Hut received
heavy consumer support. In 1991, Pepsi bought out Mr Seong and became a 100
percent foreign equity owned business. The business then expanded rapidly and grew
to 100 stores by 1996. In 1997, the restaurant division of Pepsi-Cola was spun off and
Pizza Hut Korea became a subsidiary of Tricon Restaurants (owner of KFC, Pizza Hut
and Taco Bell). Korean consumers welcomed the pizza innovations that Pizza Hut
introduced in Korea including Cheese Crust Pizza (as the name implies, string cheese is
rolled in the edge of the pizza) in 1996. In 2002, Pizza Hut introduced a major product
innovation using sweet potato as a topping on the edge of the pizza called Rich Gold
Pizza. This was an instant success and has sold more than 40 million pizzas since its
introduction. This was also the year when Tricon Restaurants changed its name to
Yum Restaurants. By 2005, the number of restaurants in Korea had grown to 341
stores. Pizza Hut continued to lead product innovation with bite sized edges on the
pizza called Cheese Bite Pizza as well as Mini Pizza (six inches) for single-person
consumption. These innovations built on the ideas from the global markets and were
modified to appeal to Korean tastes.

The keys to early success were:
. sufficient capital to expand rapidly to take early advantage of consumers’ desire

for pizza restaurants;

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. building on product successes from international markets (e.g. pan pizza, cheese
crust); and

. localizing the toppings to suit Korean consumers’ preferences (e.g. Rich Gold,
Bulgogi).

Sales also grew rapidly during this time and reached a high by 2004. Staff count grew
to over 7,000 employees by 2005.

Decline and key challenges
After going through such rapid growth, the business growth began to slow from 2002.
The key reasons for the decline were the increasing number of competitor stores, rising
income levels leading to willingness of consumers to try more upscale casual dining
restaurant concepts (e.g. TGIF, Outback Steakhouse), and last but not least, the
mismatch between value and price where consumers felt they were not receiving
appropriate value for their money (Figure 3).

In fact, this value perception was not unique to Pizza Hut but was a category
problem. These factors combined to reduce the brand equity of Pizza Hut over several
years.

Smart Lunch and Fresh Delight – value initiatives
Data gathered from various research, led the management team to decide to focus on
Smart Lunch for weekday lunch and Smart Dinner for weekday dinner. The word
“Smart” was the umbrella brand for value oriented offerings but the two offerings were
designed to meet very different needs. Smart Lunch offered a wide variety of pizzas,
pastas and salad at 6,000 won or less while the Smart Dinner set were a combination of
pizza, pasta and salad at an attractive price of 22,000 won for two people. Thus, the
offerings were designed to meet the identified needs of consumers for those different
occasions. The Smart Lunch initiative was met with very positive responses from
consumers (Figure 4) with high satisfaction level and high repeat-purchase intent.

The second major value initiative launched was a range of value priced pizza
products under the name Fresh Delight, also launched in 2008. The products were
offered at a price of 19,000 won versus the premium pizza price range of 25,000 won.
For delivery, a pair deal was offered where consumers could buy the second pizza at
10,000 won, which proved to be very popular and generated sales mix of above 30
percent within 2 months after launch.

Fresh Delight was initially received with much enthusiasm due to the low price. The
product mix of Fresh Delight two months after launch was above 30 percent due to
extremely high trial, which was one of the highest in recent history. However, the sales
began to decline after six months, and eventually, the company decided to pull the
product from the menu after one year.

Consumer research revealed some dissatisfaction with product taste and low repeat
purchase intent. The dissatisfaction arose from “insufficient amount of toppings” and
“becomes hard and dry quickly.” The amount of toppings were restricted in order to
meet margin requirements at a low selling price while the dryness was a technical issue
with the dough. The key learning from the Fresh Delight experience was that
consumers would not compromise on product taste just because it’s cheap.

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Figure 3.
Value is a category
problem

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Figure 4.
Satisfaction with Smart

Lunch

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The Special – taste initiative
The other action taken was to address the taste issue. One of the key reasons for Pizza
Hut’s business decline was that consumers consistently complained about the
“saltiness and oiliness” of Pizza Hut products. President S issued a challenge to the
R&D team to come up with a great tasting pizza product that could be sold at an
attractive price. After much trial and error, the R&D team came up with a line of
products using frozen dough that was designed to taste less oily, more chewy, more
soft and would hold up well (stay soft, chewy and tasty) under delivery conditions.
This was a radical departure from the fresh made pizza approach Pizza Hut normally
takes, and required much experimentation before a satisfactory product was
developed. The second major challenge with this product was to meet the marketing
mandated retail-selling price of under 16,000 for a medium-sized pizza. The target price
was arrived at based on pricing research that showed a significant fall-off in purchase
intent beyond the 16,000 won price. The third requirement given to R&D was that not
only did the product have to taste great at a low price, it also had to have a cost of sales
no higher than the average of the rest of the pizzas within Pizza Hut’s portfolio. Yet, it
had to taste great, be extremely attractively priced and provide good margin to the
company – a tough task indeed!

Such a price point had never been achieved before but the R&D team came through
with a creative solution using market learnings from Pizza Hut Japan. The net outcome
was the development of a line of five different pizzas called The Special that tasted
great, stayed soft and chewy even after 30 minutes (for delivery) and was priced at an
attractive price of 15,900 won while maintaining the mandated margin requirements.

Lifetime value and return on marketing investment (ROMI)
Theory on ROMI
In order to better understand the role of return on marketing investment calculations
and how it impacts the decision facing President S, it would be useful to have a brief
review of the major theories behind return on marketing (or Marketing Performance
Management / MPM) principles. Most senior executives view marketing expenditures
as short-term costs, rather than long-term investments, and has regarded marketing
expenditures as financially unaccountable (Shultz and Gronstedt, 1997). It was
postulated that marketers love to spend money, but hate to assess results of that
spending. Marketers have been accused of not being held accountable for showing how
marketing expenditures add to shareholder value and the resulting lack of
accountability has undermined marketing’s credibility (Rust et al., 2004a).

Rust et al. (2004a) have pointed out that marketers have not been held accountable
for clearly demonstrating how marketing expenditures add to shareholder value. This
lack of accountability has weakened the credibility of marketing as a function and
made it difficult for marketers to justify why their budgets should not get cut whenever
the firm has a profit shortage it needs to make up at the end of the year. Rust et al.,
2004b has developed a broad framework for assessing marketing productivity using
chain-of-effects model that relates specific actions taken by the firm to the overall
condition and standing of the firm. In addition, O’Sullivan and Abela (2007)
demonstrated that the ability to measure marketing performance has a significant
impact on firm performance, profitability and stock returns as well as marketing’s
stature within the firm using empirical data from high technology firms in the US.

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In a recent report by the Boston Consulting Group (Harsaae et al., 2010), the report
stated that companies invest staggering amounts in marketing with surprisingly little
rigor. Because it is so difficult to measure ROMI, executives often rely on
rules-of-thumb – such as spending as a percentage of revenues – to guide their
decision making.

There have been many studies conducted in the area of marketing performance
measurement (MPM). Initial studies focused on different elements of the marketing
mix. Gupta (1988) evaluated the effectiveness of sales promotions by decomposing the
sales “bump” during the promotion period into sales increase due to brand switching,
purchase time acceleration, and stockpiling. Rust (1999) began to look into the role of
marketing in more detail in his study, which indicated that the marketing function
should play a key role in connecting the customer to the product, service delivery, and
financial accountability. Rust showed that the marketing function contributes to
perceptions of firm financial performance, customer relationship performance, and new
product performance beyond that explained by a firm’s market orientation.

Clark (1999) then summarized the history and interrelationships of marketing
performance measures where he pointed out a need for the marketing community to
develop a set of fewer and simpler measures to better measure marketing performance
and a better understanding of the interrelationships among those measures.

It wasn’t until the early 2000s that ROMI concepts began to appear in research
articles. Rust et al. (2004b) presented a framework that enables competing marketing
strategy options to be traded off on the basis of projected financial return using data
from the airline industry. His strategic framework allowed what-if evaluations of
marketing return on investment to enable the firm to focus on marketing initiatives
that generates the highest return. Cook and Talluri (2004) developed a framework for
optimizing a corporation’s ROMI and highlighted the importance of ROMI to
marketing management.

In order to calculate ROMI, one of the most important elements is calculating
Customer Lifetime Value (CLV). The key input for determining return is to have an
understanding of how much each customer adds to the value of the firm. CLV is
typically used in customer relationship management analysis but is also critical in
evaluating overall ROMI. Borle et al. (2008) used a hierarchical Bayes approach to
estimate the lifetime value of a customer at each purchase occasion for a direct
marketing company.

Unfortunately, there has yet to be a final “best practice” theory of how best to
measure marketing productivity. Various scholars have set out to define the
classification system of measuring marketing expenditures for marketing performance
assessment, while others have moved forward and …

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