Jagmohan S. Raju

Marketing Renaissance: Opportunities and Imperatives for Improving Marketing Thought, Practice, and Infrastructure

My three-year term as editor of Journal of Marketing concludes with the October 2005 issue. On the basis of my interactions with various people in the marketing community, I believe that marketing science and practice are in transition, bringing change to the content and boundaries of the discipline. Thus, I invited some distinguished scholars to contribute short essays on the current challenges, opportunities, and imperatives for improving marketing thought and practice. Each author chose his or her topic and themes. However, in a collegial process, the authors read and commented on one anothers essays, after which each author had an opportunity to revise his or her essay. The result is a thoughtful and constructive set of essays that are related to one another in interesting ways and that should be read together. I have grouped the essays as follows: •What is the domain of marketing? This question is addressed in four essays by Stephen W. Brown, Frederick E. Webster Jr., Jan-Benedict E.M. Steenkamp, and William L. Wilkie. •How has the marketing landscape (i.e., content) changed? This question is addressed in two essays, one coauthored by Jagdish N. Sheth and Rajendra S. Sisodia and the other by Roger A. Kerin. •How should marketing academics engage in research, teaching, and professional activities? This question is addressed in five essays by Debbie MacInnis; Leigh McAlister; Jagmohan S. Raju; Ronald J. Bauerly, Don T. Johnson, and Mandeep Singh; and Richard Staelin. Another interesting way to think about the essays, as Jan-Benedict E.M. Steenkamp suggests, is to group the essays according to whether they address issues of content, publishing, or impact (see Table 1). These 11 essays strike a common theme: They urge marketers—both scientists and practitioners—to expand their horizontal vision. What do I mean by horizontal vision? In The Great Influenza, Barry (2004) describes the enormous strides that were made in medical science early in the twentieth century. His depiction of William Welch, an extremely influential scientist who did not (as a laboratory researcher) generate important findings, includes a characterization of the “genius” that produces major scientific achievements. The research he did was first-rate. But it was only first-rate—thorough, rounded, and even irrefutable, but not deep enough or provocative enough or profound enough to set himself or others down new paths, to show the world in a new way, to make sense out of great mysteries…. To do this requires a certain kind of genius, one that probes vertically and sees horizontally. Horizontal vision allows someone to assimilate and weave together seemingly unconnected bits of information. It allows an investigator to see what others do not see and to make leaps of connectivity and creativity. Probing vertically, going deeper and deeper into something, creates new information. (p. 60) At my request, each author has provided thoughtful and concrete suggestions for how marketing academics and practitioners, both individually and collectively (through our institutions), can work to improve our field. Many of their suggestions urge people and institutions to expand their horizontal vision and make connections, thereby fulfilling their potential to advance the science and practice of marketing. In his essay, Richard Staelin writes (p. 22), “I believe that it is possible to influence directly the generation and adoption of new ideas.” I agree. I ask the reader to think about the ideas in these essays and to act on them. Through our actions, we shape our future. —Ruth N. Bolton

Who's Got the Coupon? Estimating Consumer Preferences and Coupon Usage from Aggregate Information

Most researchers in marketing have typically relied on disaggregate data (e.g., consumer panels) to estimate the behavioral and managerial implications of coupon promotions. In this article, the authors propose the use of individual-level Bayesian methods for studying this problem when only aggregate data on consumer choices (market share) and coupon usage (number of distributed coupons and/or number of redeemed coupons) are available. The methodology is based on augmenting the aggregate data with unobserved (simulated) sequences of choices and coupon usage consistent with the aggregate data. The authors analyze various marketing scenarios that differ in terms of their assumptions about consumer choices, coupon availability, and coupon redemption. They illustrate the proposed methods using both simulated data and a real data set for which an extensive set of posterior predictive checks helps validate the aggregate-level estimation. In addition, the authors relate the empirical results to some of the findings in the literature about the coordination of coupon promotions and pricing and show how the methodology can be used to evaluate alternative coupon targeting policies.

A Theory of Combative Advertising

In mature markets with competing firms, a common role for advertising is to shift consumer preferences towards the advertiser in a tug-of-war, with no effect on category demand. In this paper, we analyze the effect of such “combative” advertising on market power. We show that, depending on the nature of consumer response, combative advertising can reduce price competition to benefit competing firms. However, it can also lead to a procompetitive outcome where individual firms advertise to increase their own profitability, but collectively become worse off. This is because combative advertising can intensify price competition such that an “advertising war” leads to a “price war.” Similar to price competition, advertising competition can result in a prisoners dilemma where all competing firms make less profit even when the effect of each firms advertising is to enhance consumer preferences in its favor. Given such procompetitive effects, we further show that cost of combative advertising could be a blessing in disguise---higher unit cost of advertising resulting in lower equilibrium levels of advertising, leading to higher prices and profits. We conduct a laboratory experiment to investigate how combative advertising by competing brands influences consumer preferences. Our experimental analysis offers strong support for our conclusions.

Competitive Consequences of Using a Category Captain

Many retailers designate one national brand manufacturer in each product category as a “category captain” to help manage the entire category. A category captain may perform demand-enhancing services such as better shelf arrangements, shelf-space management, and design and management of in-store displays. In this paper, we examine when and why a retailer may engage one manufacturer exclusively as a category captain to provide such service and the implications. We find that demand substitutability of competing brands gives rise to a service efficiency effect---service that expands the category is more effective in increasing a manufacturers sales and margin than service that shifts demand from a rivals brand. We show that the service efficiency effect may motivate a category captain to provide a service that benefits all brands in the category even though doing so is more costly. We further show that, in categories that are less price competitive, there is higher competition between manufacturers to become the category captain. Consequently, a retailer may obtain better service by using a category captain than by engaging both manufacturers simultaneously. Our findings may help explain why a retailer may rely on a category captain despite concerns regarding opportunism and why there is limited empirical evidence of harm to rival manufacturers.

A Price Discrimination Model of Trade Promotions

Critics have long faulted the wide-spread practice of trade promotions as wasteful. It has been estimated that this practice adds up to

Theoretical models of sales promotions: Contributions, limitations, and a future research agenda

100 billion worth of inventory to the distribution system. Yet, the practice continues. In this paper, we propose a price discrimination model of trade promotions. We show that in a distribution channel characterized by a dominant retailer, a manufacturer has incentives to price discriminate between the dominant retailer and smaller independents. While offering all retailers the same pricing policy, price discrimination can be implemented through trade promotions because they induce different inventory-ordering behaviors on the part of retailers. Differences in inventory holding costs have been shown to be an important determinant of consumer promotions. Our analysis suggests that differences in holding costs are also potentially an important driver for the use of trade promotions. The implications from our model explain a number of anecdotal and/or empirically observed puzzles about how trade promotions are practiced. For example, our analysis explains why chain stores welcome trade promotions but independents do not. Our analysis outlines implications for managing trade promotions.

Positioning and Pricing in a Variety Seeking Market

Our objective in this paper is to review theoretical models of sales promotions. We highlight the key contributions of these models, discuss their limitations, and outline an agenda for future research. Managerial questions examined in these models include some very fundamental issues such as why firms resort to the use of sales promotions in mature markets, and why the use of sales promotions has increased dramatically during the last two decades. Also included in this review are models that address firm level strategic issues such as the allocation of dollars between advertising and sales promotions, and the relative emphasis on trade promotions vis-a-vis consumer promotions. We also review theoretical models that explain how consumers respond to price promotions, and what type of sales promotion tools may be superior to others in a particular market. The review concludes with a possible agenda for future research.

'Showrooming' and the Competition between Store and Online Retailers

We study competitive positioning and pricing strategies in markets where consumers seek variety. Variety seeking behavior is modeled as a decrease in the willingness to pay for the product purchased on the previous purchase occasion. Using a three-stage Hotelling-type model, we show that the presence of variety seeking consumers reduces product differentiation offered in equilibrium, thereby explaining some otherwise counterintuitive findings in empirical research. We find that firms charge higher prices in Period 1 and lower prices in Period 2. The lower price in Period 2 represents the price incentive that firms need to offer to prevent the variety seeking consumers from switching. Furthermore, we find that the observed switching in a market may not fully capture the true magnitude of the underlying variety seeking tendencies among consumers. Finally, we show that the presence of variety seeking consumers leads to lower firm profits and a higher consumer surplus. Surplus increases for variety seeking consumers as well as regular consumers. Therefore, the presence of variety seeking consumers benefits everyone in the market.

The Strategic Value of High-Cost Customers

Customers often evaluate products at brick-and-mortar stores to identify their “best fit�? product but buy it for a lower price at a competing online retailer. This free-riding behavior by customers is referred to as “showrooming�? and we show that this is detrimental to the profits of the brick-and-mortar stores. We first analyze price matching as a short-term strategy to counter showrooming. Since customers purchase from the store at lower than store posted price when they ask for price-matching, one would expect the price matching strategy to be less effective as the fraction of customers who seek the matching increases. However, our results show that with an increase in the fraction of customers who seek price matching, the stores profits initially decrease and then increase. While price-matching could be used even when customers do not exhibit showrooming behavior, we find that it is more effective when customers do showrooming. We then study exclusivity of product assortments as a long-term strategy to counter showrooming. This strategy can be implemented in two different ways. One, by arranging for exclusivity of known brands (e.g. Macy’s has such an arrangement with Tommy Hilfiger), or, two, through creation of store brands at the brick-and-mortar store (T.J.Maxx uses a large number of store brands). Our analysis suggests that implementing exclusivity through store brands is better than exclusivity through known brands when the product category has few digital attributes. However, when customers do not showroom, the known brand strategy dominates the store brand strategy.

A Note on the Relationship between Firm Diversification and Corporate Advertising Expenditures

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 rivals 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. This paper was accepted by J. Miguel Villas-Boas, marketing.