Group 6

Chapter 12 Summary

Managers tend to make decisions using mental models using their prior experience and
domain knowledge. But decisions made through this could be heavily biased. Therefore, a
technique called market engineering which combines data and prior knowledge to make
decisions objectively is used. One of the benefits of using marketing analytics is that
predictions based on past data are more accurate. But to improve the efficiency, either mental
models must be codified in a way that can be used or variables that would be helpful in
decision making must be identified.

One of the tools for performing market engineering is the market response model. A market
response model is used to analyze the effects or responses of an output metric based on the
changes in the input metric. Market response models should have the inputs (like costs or
metric whose change we would want to analyze), the quantifiable output metrics that are
linked to the input metrics and a clear objective.

A model therefore would establish relationship between a dependent variable and

independent variables along with some parameters that would be estimated such that those
values of the parameters when used with input variable would give us an accurate value of
the dependent variable. This estimation of the unknown parameters is called calibration.

Some commonly used models are:

1) Linear Model: Y = a + bX
2) The Power Series Model: Y = a + bX + cX2 + dX3 + …
3) The Fractional Root Model: Y = a + bXc
4) The Semi-Log Model: Y = a + b ln X
5) The Exponential Model: Y = aebX (X > 0)
6) The Modified Exponential Model: Y = a(1-e-bX) + c
7) The Logistic Model: Y = a/ (1 + e-(b + cX)) + d

In all these models, the accuracy of the parameters (like a,b, etc.) are crucial in estimating the
dependent variable. A popular method used to improve the accuracy is the least squares
method. Here, a set of observations of the dependent variable Y is taken along with the
corresponding dependent variables X1, X2 etc. Here the goal is to make sure that the square
of difference between the actual value of Y for a given values of dependent variables and the
Y value estimated using the model is as low as possible. If the set of values used for
calibration are actual data, it is called objective calibration whereas if the values chosen are
subjective values and not actual values, it is called subjective calibration. The measure called
R-Squared is used to indicate the fit of the model. It ranges from 0 to 1. A value close to 1
indicates that the model can accurately predict y values given the independent variables
whereas a model with R2 value close to 0 is very less accurate and is not recommended. Some
of the common objectives are increasing their short-run and long-run profits by changing one
or more of the causal variables like advertising spends etc.

But, in reality, a model does not include just the dependent variables but also accounts for the
effects of competitors, market share and also the response on an individual customer level.
While choosing the correct model, it is important to understand if all the important decision
variables can be incorporated in the model, if the model fit is good enough and how easy the
model is to use.

With increase in adaptation of technology in firms, the use of Marketing Information Systems
(MKIS) is increasing. Based on the degree of integration of the MKIS & the degree of
visibility, there can be four different types of models:

1) Visible Stand-Alone Models: These are stand-alone applications that can be accessed
via client browsers and are used for specific tasks.
2) Component Objects: These are also stand-alone models but with low visibility. They
are generally home-grown modules that provide firm-specific data and insights that
can be accessed anywhere.
3) Integrated Component Objects: These are systems that are integrated and hence are
capable of interacting with other components to get data. They are generally fully
automated and have frequent updates.
4) Integrated Systems of Models: These systems integrate multiple decision models and
provide a way for multiple managers to enter data and derive insights. They are
usually run in servers and have a group decision support system to facilitate
transactions.