Marketing plan
The Strategic Value of High-Cost Customers
Upender Subramanian, Jagmohan Raju & John Zhang
Management Science, forthcoming
Abstract:
Many firms today manage their existing customers differentially based on profit potential, providing fewer incentives to less profitable customers and firing unprofitable customers. Although researchers and industry experts advocate this practice, results have been mixed. We examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold. We analyze a setting where customers differ in their cost to serve. We find that when a firm can discriminate among its customers but the rival cannot, customer base composition influences the rival's poaching behavior. Consequently, even though a low-cost customer is more profitable when viewed in isolation, a high-cost customer may be strategically more valuable by discouraging poaching. Therefore, contrary to conventional advice, it can be profitable for a firm to retain unprofitable customers. Moreover, some customers may become more valuable to retain and receive better incentives when they are less profitable. We further show that, in competitive settings, traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions toward some customers impose on the cash flows from other customers. Our results suggest that firms may need to evolve from a segmentation mindset, which views each customer in isolation, to a customer portfolio mindset, which recognizes that the value of different customers is interlinked.
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Explicit Evidence of an Implicit Contract
Andrew Young & Daniel Levy
Journal of Law, Economics, and Organization, forthcoming
Abstract:
We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers — a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the “secret formula,” at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude that the perceived costs of breaking the implicit contract were large.
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An Experimental Test of the Effectiveness of Terms & Conditions
Zev Eigen
Northwestern University Working Paper, October 2013
Abstract:
Requiring individuals to consent to “terms & conditions” is the overwhelmingly dominant strategy used to try to curb unauthorized use of products like motion pictures and music. This study is the first to employ a randomized controlled behavioral experiment testing whether this strategy is as effective as other means of achieving this goal. Individuals randomly assigned to either a “terms and condition” (“T&C”) frame or alternative frames (promise-keeping, trust, threat, naked request, and a control) were presented an opportunity to take an online presidential election poll more than once (and receive additional remuneration each time they did), even though they were made aware that they were not authorized to do so. The T&C frame was the least effective at keeping subjects from taking the poll more than once. Asking individuals to promise not to behave in the undesirable way, or signaling trust that they would not behave in the undesirable way were the best frames for curbing unauthorized multiple poll-taking.
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Should Event Organizers Prevent Resale of Tickets?
Yao Cui, Izak Duenyas & Ozge Sahin
Management Science, forthcoming
Abstract:
We are interested in whether preventing resale of tickets benefits the capacity providers for sporting and entertainment events. Common wisdom suggests that ticket resale is harmful to event organizers' revenues and event organizers have tried to prevent resale of tickets. For instance, Ticketmaster has recently proposed paperless (non-transferrable) ticketing which would severely limit the opportunity to resell tickets. We consider a model that allows resale from both consumers and speculators with different transaction costs for each party. Surprisingly, we find that this wisdom is incorrect when event organizers use fixed pricing policies, in fact event organizers benefit from reductions in consumers' (and speculators') transaction costs of resale. Even when multiperiod pricing policies are used, we find that an event organizer may still benefit from ticket resale if his capacity is small. While paperless ticketing is suggested as a way to reduce ticket resale and prevent speculators from buying tickets, our results suggest that it may reduce the capacity providers' revenues in many situations. Instead, we propose ticket options as a novel ticket pricing mechanism. We show that ticket options (where consumers would initially buy an option to buy a ticket and then exercise at a later date) naturally reduce ticket resale significantly and result in significant increases in event organizers' revenues. Furthermore, since a consumer only risks the option price (and not the whole ticket price) if she cannot attend the event, options may face less consumer resistance than paperless tickets.
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Soren Anderson et al.
NBER Working Paper, October 2013
Abstract:
We document a strong correlation in the brand of automobile chosen by parents and their adult children, using data from the Panel Study of Income Dynamics. This correlation could represent transmission of brand preferences across generations, or it could result from correlation in family characteristics that determine brand choice. We present a variety of empirical specifications that lend support to the former interpretation and to a mechanism that relies at least in part on state dependence. We then discuss implications of intergenerational brand preference transmission for automakers’ product-line strategies and for the strategic pricing of vehicles to different age groups.
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How Firms Can Go Wrong by Offering the Right Service Contract: Evidence from a Field Experiment
Eva Ascarza, Raghuram Iyengar & Martin Schleicher
Columbia University Working Paper, October 2013
Abstract:
Past evidence reveals that customers make ex-post mistakes when choosing service plans. Fearing a negative impact from customers’ overspending mistakes on long-term profits, some firms are becoming proactive and now recommend optimal tariffs to their existing customers. In this paper, we use a randomized field experiment to examine the profitability of encouraging existing customers to switch to better plans. We find that encouraging customers to switch to cost-minimizing plans can actually harm the firm. The primary source for this negative effect is the change in behavior among customers who decide to reject the firm’s recommendation. For this set of customers, churn notably increases, resulting in substantial losses. We propose two mechanisms for such increase in churn, namely lower inertia and customer regret. Our data provide empirical evidence for both drivers in the context we study. We also explore the impact of hypothetical targeted campaigns. The results suggest that selecting the right customers to target has a higher impact on profitability than allocating customers into optimal tariffs.
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Celebrity Endorsements, Firm Value, and Reputation Risk: Evidence from the Tiger Woods Scandal
Christopher Knittel & Victor Stango
Management Science, forthcoming
Abstract:
We estimate the stock market effects of the Tiger Woods scandal on his sponsors and sponsors' competitors. In the 10–15 trading days after the onset of the scandal, the full portfolio of sponsors lost more than 2% of market value, with losses concentrated among the core three sponsors: Electronic Arts, Nike, and PepsiCo (Gatorade). Sponsors' day-by-day losses correlate strongly with Google search intensity regarding the endorsement-related impact of the scandal, as well as with qualitative indicators of “endorsement-related news.” At least some sponsors' losses were competitors' gains, suggesting that endorsement deals are partially a business-stealing strategy. However, competitors who were themselves celebrity endorsement intensive fared relatively worse than those who were not endorsement intensive, and that difference also correlates day by day with news/search intensity regarding the scandal. It appears that the scandal sent a negative marketwide signal about the reputation risk associated with celebrity endorsements.
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League-Level Attendance and Outcome Uncertainty in U.S. Pro Sports Leagues
Brian Mills & Rodney Fort
Economic Inquiry, January 2014, Pages 205–218
Abstract:
We extend the breakpoint literature regarding annual league-level attendance and the impact of outcome uncertainty to the National Basketball Association, National Football League, and National Hockey League. As our measures are different than past work on baseball, we also apply our model to the American and National Leagues. Attendance series for each league under consideration are not stationary overall, but are stationary with break points. No form of outcome uncertainty (game, play-off, or across seasons) matters for attendance in hockey or baseball regardless of which game uncertainty variable is used. Under the measure of game uncertainty that recommends itself for football, only play-off uncertainty matters for attendance. Whether outcome uncertainty matters for basketball depends on the measure of game uncertainty. Situational similarities in the break points across leagues suggest general areas for future research.
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Lawrence Tamburri, Johnathan Munn & Jeffrey Pompe
Managerial and Decision Economics, forthcoming
Abstract:
We examined the relationship between funding sources and programming for major US symphony orchestras for the 2001 through 2007 seasons. We find that increased levels of funding from the federal government and businesses encourage more nonconventional programming, and increased levels of funding from local government and endowments encourage more conventional programming. In addition, yearly events such as a composer's anniversary and higher unemployment influence programming decisions. Given the challenging financial environment for symphony orchestras, we discussed programming choices that managers could implement to reduce budget deficits.
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Belen Blanco, Encarna Guillamón-Saorín & Andrés Guiral
Journal of Business Ethics, September 2013, Pages 67-83
Abstract:
This study investigates the effects on organization’s financial performances of, first, the extent to which the organizations are involved in controversial business activities, and second, their level of social performance. These companies can be considered non-socially responsible given the harmful nature of the activities they are involved in. Managers of these companies may still have incentives to pursue socially responsible actions if they believe that engaging on those actions will help them to achieve legitimacy and improve investors’ perception about them. We develop a comprehensive methodology to investigate these corporate social performance (CSP)-related effects in a complex but specific setting. To this end, we analyze a sample of 202 US firms for the period 2005–2008 using a novel method in this area: partial least squares. Our results indicate that, contrary to the general findings in prior literature, companies involved in controversial business activities which engage in CSP do not directly reduce the negative perception that stakeholders have about them. Instead, we found evidence of a positive mediation effect of CSP on financial market-based performance through innovation.
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How Video Rental Patterns Change as Consumers Move Online
Alejandro Zentner, Michael Smith & Cuneyd Kaya
Management Science, November 2013, Pages 2622–2634
Abstract:
How will consumption patterns for popular and “long-tail” products change when consumers move from brick-and-mortar to Internet markets? We address this question using customer-level panel data obtained from a national video rental chain as it was closing many of its local stores. These data allow us to use the closure of a consumer's local video store as an instrument, breaking the inherent endogeneity between channel choice and product choice. Our results suggest that when consumers move from brick-and-mortar to online channels, they are significantly more likely to rent “niche” titles relative to “blockbusters.” This suggests that a significant amount of niche product consumption online is due to the direct influence of the channel on consumer behavior, not just due to selection effects from the types of consumers who decide to use the Internet channel or the types of products that consumers decide to purchase online.
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When a Reputation for Innovativeness Confers Negative Consequences for Brands
Jeffrey Larson, Kelly Goldsmith & Bradley Allen
University of Pennsylvania Working Paper, August 2013
Abstract:
Both the academic and business practitioner literatures agree that a brand reputation for innovativeness is beneficial. To the contrary, we find that such a reputation can confer negative consequences for brands. Specifically, we find that when a brand is associated with a reputation for innovativeness, consumers perceive new products from the brand to be of lower quality, as compared to when the same brand is associated with other reputations (e.g., excitement). We show that this outcome occurs because consumers believe that new products are more prone to malfunction when they come from a brand with a reputation for innovativeness. Further, we provide evidence suggesting that the negative effects of a brand reputation for innovativeness have consequences for purchase interest. We discuss our findings in light of past research demonstrating the positive consequences of a brand reputation for innovativeness as well as the managerial and theoretical implications of this work.
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Endogenous Market Structures and Innovation by Leaders: An Empirical Test
Dirk Czarnitzki, Federico Etro & Kornelius Kraft
Economica, forthcoming
Abstract:
Models of competition for the market with endogenous market structures show that, contrary to the Arrow view, an endogenous entry threat induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions using a unique dataset for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats as perceived by the firms (in survey data) reduce R&D intensity for an average firm, but they increase it for an incumbent leader. These results hold after a number of robustness tests with instrumental variable regressions.
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Change at the Checkout: Tracing the Impact of a Process Innovation
Emek Basker
University of Missouri Working Paper, June 2013
Abstract:
Barcode scanners, introduced in the early 1970s, were a foundational process innovation in the grocery supply chain. By 1984 scanners had been installed in 10% of food stores in the U.S. Difference-in-difference analysis of city-level price data shows that scanners reduced prices of groceries by about 1.4% in their first decade. The results are consistent with prior estimates of labor saving by scanners and better information available to stores. Early adopters and adopters in states that imposed fewer restrictions on complementary process innovations contributed disproportionately to the price decreases.