Profit Impact of Marketing Strategy: PIMS Study

 

 

PIMS is a statistical model that investigates the relationship between strategic variables and profitability of companies. It was the result of the initiative taken at General Electric in the 1960’s under the leadership of Sidney Schoeffler.

This model relies on empirical data across various industries to study the impact of various strategic variables on profit volumes of organisations. It was a major breakthrough in the field of marketing studies in that it relied on a verifiable method of empirical analysis using regression techniques as opposed to bald conceptual frameworks not supported by hard data from the industry. The model is an endeavour to generalise the strategic determinants of profitability without disregarding the peculiarities of a given market terrain.

The PIMS study lends predictability to strategic decision making. It relies on ROI as a key criterion of strategy choices. The most important aspect of the model is the variables it uses in analysing the impact on profitability of strategic decisions. The nature and number of variables used in the analysis is an on-going development. They can be broadly divided into 2 types: Market related variables and non-market related variables (1).

Market related variables include aspects such as market share, relative market share, pricing, product quality etc. Non-market variables include factors such as R&D expenditures, investment intensity, technological development, labour productivity (2).

Some of the key findings of PIMS are that High market share leads to high profitability. This has been the most studied finding of the PIMS project and has been confirmed in subsequent studies (3).

The model also reports a positive correlation between product quality and profitability as also between employee productivity and profitability. As regards, capital intensive initiatives, it finds that capital intensive strategies are characterised by low return on investments (4). A normative implication of this finding is that labour productivity ought to be the focal point for strategic decisions as opposed to heavy investment in machinery or technology.

While the generalisation afforded by the vast database of the PIMS project is attractive and indeed useful, it must be taken with a pinch of salt. One general criticism of the PIMS model is that the model fails to make any clear distinction between causal relation and co-incidence. However, this criticism seems to disregard the essential nature of empirical analysis on which the model relies. However, there is some merit to the apprehension that confusion between causal relation and mere co-incidence can be misleading (5).

Another important criticism is the multi-colliniarity of the variables. It means that the variables used may affect each other and hence are not independent. This problem is widely acknowledged to be implicit in the model (6). However, notwithstanding the limitations, the robust database on which the model rests is certainly of great value in strategic decision-making. The model coupled with sharp awareness of market peculiarities is still a critical source of input for managers.

 1. Schnarrs, ‘Marketing Strategy: A Customer driven Approach’ The Free Press (1991)

2. C W Roney, ‘Strategic management Methodology’ Praeger Publishers (2004)

3. See: Szymanski et al: ‘An analysis of Market share-Profitability Relationship’ J. Mark (1993) 1-18

4. Ghemavat & Caves, ‘Capital Commitment and Profitability: An empirical analysis’ Oxfor Economic Paper, New Series Vol. 38, Nov 1986 (94-108)

5. John O’Shaughnessy, ‘Explaining Buyer Behavior: Central Concepts and Philosophy of Science Issues’ OUP (1992) [32]

6. See: Challenges and Perspectives in using PIMS Methodology to explain the success of marketing strategy in business’ available at http://www.scielo.org.mx/pdf/cya/n234/n234a5.pdf

Psychological Pricing – The Psychological Effects of Numbers in Prices

Have you often wondered why a lot of shopkeepers tend to keep prices ending in 99 cents ? Or why would a shopkeeper rather not price the item for sale at a round figure in dollar than keep it priced at one cent short of a round figure?

It’s nothing but psychological pricing. Psychological pricing or ‘price ending’ as it is more commonly referred to is nothing but a marketing theory based on the assumption that certain numbers in prices have a psychological effect on the consumer or buyer. This theory rests on the principle that the use of price endings drives demand for the product much higher than what it would be with perfectly rounded prices. For example if the price of a product is mentioned at $299.95 instead of $300, the consumer would ‘perceive’ much higher value of the product and chances of purchase increase.

The theory of psychological pricing is based on one or more of the few hypotheses discussed here. One of the hypothesis states that consumers often tend to ignore the lesser significant digits – in this case the cents. Rather than doing proper rounding of the price, the consumer tends to overlook the value of the cents and compares the dollar value to dollar value. This may also be the reason why sometimes the cents are printed in superscript font – to make them appear even smaller and insignificant.

Another hypothesis is that fractional prices tend to make the consumer believe that the products are being sold at the least possible price – that the seller has made every possible deduction to make the price appear as it does – in decimals and fractions.

Another hypothesis points to the correlation between the price and perceived quality of a product. This correlation states that customers may perceive products with a higher price to be of better quality. So in effect this hypothesis implies that some premium products are better priced as round figures rather than fractions – for example a $10 product would be perceived as superior to one priced at $9.99.

Psychological pricing is so common today that some brands are known for using the fraction pricing in setting the price of their products.

That said, the theory of psychological pricing is controversial. Some studies challenge the psychological pricing theory stating that buyers as young as children are well aware of the relative and ‘true’ pricing of the product; and psychological pricing does not do much to influence them. Pricing remains as one of the most important and complex part of the marketing mix, and one needs to research well in order to arrive at the right solution which means that without testing different prices the real effect on demand will remain a theory.

How Important is the Selling Location of A Product

How Important is the Selling Location of A Product

It is common to hear business honchos stressing the importance of the place of selling a product or service – “location is everything” you often hear them say – but how true is this common belief? Is it possible for a factor like location of a business to make or break the success or future of the entity? Yes, location is indeed a very influential factor in deciding the future of a business concern.

In fact, there are several factors that are crucial to pay attention to when deciding the location of any business. Some of the more important points of these factors are the nature of business, distribution channel used by the business, the amount of exposure required for the product to gain acceptance within the target audience, proximity to competition, etc. Even in a trade show all those displays don’t have the same marketing attraction due to their location. Trade show display designs (Messestand4you.de) play a vital role but without the right place this design will not catch the eyes of the visitors.

The nature of business is the factor to be considered before any other when deciding the location of the business – A service being provided through the internet or any other small scale business run from one’s home does not need a separate location to start the operations. One of the many benefits of the internet has also been to bring the market closer to the consumer through various online promotions and marketing schemes.

Another important factor to consider while deciding the location is the distribution channel being adopted by the company. A business that follows indirect distribution channels (selling through distributors and retailers) needs to have a widespread network of resellers to ensure good market coverage. However, a company following a direct distribution method needs to ensure that their own manufacturing / selling location is easily accessible to the customer. Alternatively, the company needs to ensure that they are available to the consumer on the web world.
The product itself is also a big determinant of the business location. For heavier products, usually the manufacturing facility tends to be set-up in close proximity to the source of raw material, so as to minimize logistics cost. However, this does pose as a drawback in terms of not being as close to the point of sale or customer.

It is also important to have a business location that provides optimal exposure to your business as well as the products and services on offer for sale. A small hid-away store will hardly do any good to the sales as compared to a shop in the main market place or on a well accessible street.

Another important factor to consider before you finalize the location of your business is the proximity of competition. There’s no point in finalizing a location where your competitor’s business is located round the corner and possible at a much busier and accessible market place. Thus, proper research beforehand is much necessary.
Apart from all the above, accessibility to general public and to employees, the option of expansion of the office at a later time, appropriate utilities and clean and pleasant surroundings are some other factors that one might want to consider before deciding on the location of a business concern.

What Does AIDA Stand For

What Does AIDA Stand For

In today’s competitive market, it is a tough fight to grab the attention of your prospective buyers – be it coming out with newer advertisement concepts, sharing company results with shareholders, emails sent out, pamphlets distributed – everything needs to be an attention grabber. However, even though the advertising world may become competitive and advertisements become sophisticated, the basic principle behind the advertising remains the same – to grab attention and play upon the moment of attention to close the sale. It is here that the marketing tool AIDA helps us to understand the simple yet effective process for achieving the aforementioned goal.

AIDA is a famous acronym used in the Sales & Marketing world – used to describe a model for effective selling. The acronym stands for a four stage effective selling process which comprises of four steps namely Attention, Interest, Desire and Action.

As per the AIDA model, to achieve most effective response or outcome from a sales pitch, a salesman needs to follow this four step process from attracting Attention to generating Interest to kindling Desire and finally taking the selling Action. Each of the four steps in AIDA can be understood as below :

A – Attention – This step talks about the need to be quick and agile to grab the prospective buyer’s attention. This may be done by using strong and direct advertising, powerful words, eye-catchy pictures – anything that will hold the onlooker’s attention. In this step the only objective is to convince the prospective buyer to hear you out and to let you continue the meeting / communication.

I – Interest – This step is about the salesperson engaging the customer enough to want them to know more about the product / service in question. This is a very challenging task; you’ve managed to grab the attention of the customer but will you be able to arouse interest in the product? Even though the prospective customer may not be thinking of buying the product, the salesperson needs him to want to seek more information about the product.

D – Desire – This step is all about kindling a desire in the prospective customer for the product / service being sold. This is done in conjunction with generating interest. The salesman needs to link the features of the product or service with the needs and wants of the customer so that it’s easier for the customer to see the benefits accruing out of the purchase.

A – Action – This step is about cajoling the customer into taking the final plunge (of purchasing) – the action that you have been waiting for him / her to take. This step should not be taken lightly, as many times a lot of customers back out at this last stage. So care should be taken to not assume that kindling a desire would automatically mean that the customer will make the purchase (action).

The above four steps of AIDA would always ensure a higher success rate with the prospective customer than a random approach.

Emotional marketing

The Strategy of Emotional Advertising

Emotional Advertising – a long existing but recently revisited concept in the ad world – is all about getting the consumer to connect with your product or service at an emotional level.

Emotional advertising is not a usual direct advertising method. The advertisements using this approach to deliver the message are often so indirect that the person watching the advertisement would not even realize that the product or service is being marketed to him or her.

The concept of emotional advertising plays upon portraying the product as if the ad-watcher himself / herself is a consumer of the product. The benefits of the product are shown by means of a story or drama on screen and works towards getting the ad-watcher so involved in the story and with the characters that they connect with the advertisement on an emotional level.

The underlying principle of emotional advertising is to expose the consumer to emotions – happiness, sadness, sympathy, surprise or any other – and elicit a response. Human beings inadvertently generate an emotional response to most of the things we encounter in life. This includes the advertisements we see – and emotional advertising takes benefit of this human tendency to send the message (of the product or service) across.

For emotional branding to be successful, it is important that the people and the brand behind the product or service ‘walk the talk’. To put this in an example, an airline company may use an advertisement based on the concept of ‘bringing families together’ to connect with the consumer on an emotional level, but if in reality the airline is notorious for delays in flights and / or competence of their staff, then the advertising may not be very effective to increase the bottom-line of the company – although the advertisement engages with the consumer at an emotional level. Similarly, a car advertising itself to be a status symbol may hit the chord with the consumer, but at the same time the consumer would also want to evaluate the proposition based on other factors like mileage, robustness of the car, etc.

To summarize, emotional advertising does help a company to stand above competitors and quickly move up the ladder from a follower to a market leader. This strategy also helps to earn customer loyalty and earn revenue. However, this advertising strategy will be successful only when it’s relevant to the consumer and based on authentic facts. If the advertising conflicts with the product features or benefits in reality, then the advertising – even though hitting the emotional chords of the consumer – will hardly be effective.