JEAN-JACQUES LAMBIN*

This approach to developing and implementing a dynamic, competitive market-

ing mix model for a major oil company combined econometric methods, simula-
tion techniques, and subjective judgments. Regression coefficients provided esti-
mates of the response functions of the different inputs.
A Computer On-Line Marketing Mix Mode
THE PROCESS OF MARKETING
PROGRAMMING
The ultimate objective of an analytical marketing mix
model is to assist management in predicting the likely
effects of alternative marketing strategies by: (1) descrip-
tion of the marketing system, (2) empirical estimation of
response, (3) validation and prediction. Management is
primarily concerned with the last step, which in fact has
received least attention. This article reviews these steps
as an introduction to description of a dynamic, competi-
tive marketing mix model, estimated by the ordinary
least squares (OLS) method for a major oil company.
Econometric methods, simulation techniques, and sub-
jective judgments were combined, and regression coef-
ficients were taken as historical summaries providing a
priori estimates of the response functions of the different
uiaiketing inputs. The model uses an on-line computer
conversational mode, which enables management to in-
corporate subjective judgments and to update prior esti-
mates as new information becomes available. An impor-
tant feature of this on-line system is that it helps the user
understand a prob'cm and its solution as he works on it
[15]. The model is currently on trial by the company.
Description of the Marketing System
Systems analysis provides a framework for visualizing
internal and external factors as an integrated whole and
thereby helps management to quantify complex market-
ing processes [6. 7].
A diagram of the marketing system for the gasoline
* Jean-Jacques Lambin is Professor of Marketing at Louvain
and Mons Universities of Belgium and Research Director of
the Center for Socio-Economic Studies in Advertising and Mar-
keting, Loiivain. He acknowledges the programming assistance
of Professor De Smet of Mons University and the helpful com-
ments of Philippe Naert.
market used in this study is in Figure 1. At the left are
the environmental variables of the larger system within
which this company operates. In this case, estimates of
total future gasoline consumption were available under
different sets of assumptions regarding the main demand
determinants. These estimates were derived from obser-
vations over the period 1950-1970 [4].
In the central part, the company's decision variables
are described in interaction with competitive decision
variables. Despite the absence of price competition,
competitive interaction, described by the lines connect-
ing the boxes, was strong. The productivity of each in-
put could differ significantly from one brand to the
other. For example, a five-percent share of the total
number of service stations could mean different rates
of penetration according to station type, size, location,
or dealer. The same could hold true for the creativity
and communication values of advertising. These quali-
tative dimensions directly determine the efficiency of
the marketing mix and the slope of the response func-
tions. Although overall performance rests directly on
the technical efficiency of each input, the planner must
determine the level, the mix. and the allocation of mar-
keting resources, given the present level of technical ef-
ficiency of each marketing instrument [18, pp. 222-
37]. This marketing mix model was designed precisely
to assist management in this task.
At the far right, output is expressed in terms of sales
and market share. The buyer behavior mode! was left
unspecified since the model-building approach adopted
estimates aggregate response functions [1]. The lack of
behavioral input reduced predictive power, but this
limitation is not severe if the model is periodically re-
vised. Adaptation to changing conditions and continuous
control of the model recommendations and dynamic ad-
juslments should move the model's parameters closer to
their true values [14].
119
Journal of Marketing Research,
Vol. IX fMay 1972), 119-26
120
JOURNAL OF MARKETING RESEARCH, MAY 1972
Fi gure 1
THE MARKETING SYSTEM: GASOLINE MARKET
MARtCEI
ENVIRONMENT
MARKETING
MIX DECISION
MODEL
MARKETING
DECISION
VARIABLES
PRODUCTIVITY
OF MARKETING
FACTORS
BUCK BOX :
CONSUMER
BEHAVIOR
OUTPUT:
SALES AND
PROFIT
INDUSTRY
OEMANO
CARS
OWN ER SH i P
CUB IC
CAPACI T
CULTURAL
FACTORS
MOTOO WAYS
FEEDBACK FEEOBACK
CDMPANY
WRKETINO
MIX
MODEL
_L
COMPEIITtON
MARKETING
MIX
MODEL
ll
l/z.
PROOUCT
QUALITY
PRI CI NG
DISTRIBUTION
//
PO1N T . 0F_
SALE
PROMOTION
MASS MEDIA
ADVERTISING
PROOUCT
MIX
PBEM lUM
BE OUUAP
DIESEL
r
DISIRIBUflON
MIX
STATION
I N&
STATION
ADVERTISING
MIX
PB EbS
RADI Q
Model Construction
The next step was to put this description in quantita-
tive terms via the dynamic, competitive model.
Since there was no price differential among compet-
ing brands in the market studied, the more active mar-
keting instalments were distribution, advcrlising, and
point-of-sale promotion [13]. Distribution was the most
influential of these. Because of large differences among
outlets, the total network was subdivided into service
stations and other outlets; significant differences in re-
sponse functions were expected. Regarding advertising,
press advertising represented most of the total. The
following analysis was performed using only total ad-
vertising outlay, but individual media variables could be
included.
It was hypothesized that a brand's market share is
determined by the relationship of its marketing expendi-
tures to the total for the industry [8. 24]. Without con-
sidering dynamic factors, the "relative marketing pres-
sure*' concept can be expressed as:
(1)
where: MS ^ market share
DS = number of service stations
DO number of other outlets
ST = total advertising expenditures
e ^ sensitivity coefficient.
This model is not linear and cannot be estimated by
standard econometric methods. Rather, a trial and error
or heuristic approach based on the manager's best judg-
ment and the computational power of the computer was
applied; sec [24]. This procedure did not prove useful.
No optimum solution was found, the various hill-climb-
ing routines did not converge, and optimal fit could not
be guaranteed. A comparison of the actual and predicted
market share (1) is made in Figure 2.
An alternative form [11, 13, 22, 23, 25] is:
(2)
in which all the variables are expressed in terms of mar-
ket share. This model can be estimated directly for
A COMPUTER ON-LINE MARKETING MIX MODEL
121
each competing brand by OLS. The exponents, or con-
stant elasticities, represent proportionate change in
market share as the result of proportionate change in
each variable. If estimated independently, however,
these models' predicted shares do not always sum to
unity across all brands, as in (1), so variables and co-
efficients should be sum-constrained to unity [21, pp.
46-7J. In (2), this contraint has not been incorporated.
Thus the parameters must be interpreted as simple his-
torical summaries. The usefulness of (2) is that it lends
itself easily to empirical estimation on the basis of past
data, to provide sound prior estimates of market share
elasticities. When used for evaluating alternative strate-
gics, these prior estimates can be adjusted in the simula-
tion model.
Sales response is usually distributed over time, and the
model must capture these lagged effects. A dynamic,
linear version of (2) is:
(3)
= k h.DO,*
derived by Koyck transformations [10]:
(4) ^ ^ ^ ,
Model (3) differs from (2) in that the lagged dependent
variable appears in the right-hand side of the equation. ^
The regression coefTicient of this variable (A) is an esti-
mate of each brand's retention rate, a concept very close
to the repeat purchase probability. This Koyck expo-
nentially distributed lag model [10] has been applied in
several similar studies on the economic effects of adver-
tising [2, 11, 12, 16, 17, 19, 22, 23]. The model's un-
dedying assumption is that effects of the marketing
variables die away to zero in a decreasing geometric pro-
gression with parameter A, (0 < A < 1). This parame-
ter can be used to estimate long-term elasticities.
It is assumed in (3) that the variables follow the same
exponential decay pattern, so the estimated value of A
includes not only the effects of past advertising, but also
the assets accumulated through the brand's distributive
network as well as a combination of these two factors.
Formally, A can be defined as:
(5) X = x,5 - I - x , e
where 5 ^ relative weight of the goodwill capital cre-
ated by the distributive network (in per-
cent)
8 = relative weight of the goodwill capital cre-
ated by advertising (in percent)
8d = relative weight of the goodwill capital cre-
ated by the interaction of advertising and
distribution (in percent).
^ The asterisks denote share variables.
Figure 2
COMPARISON OF ACTUAL AND CALCULATED
MARKET SHARES
S ID li 14 16 18 20 iZ 2A ZG 28 30 iZ 34
Neglecting ihe product term, (5) simplifies to:
(6) X - X]5 -\- \S
where * + S = I.
Thus Al and \-> are parameters to be estimated. If
both advertising and distribution have lagged effects,
the exponentially distributed lag model is:
(7)
-h
A different time-share of reaction was postulated in this
study for the service station {DS*) and total advertising
(ST*) variables. For ST*, the market share was a func-
tion of two unweighted lagged advertising variables and
a geometrically weighted average of ail other past ad-
vertising shares. There was little variation in service sta-
tions' shares, so the best fit was observed when a geo-
metric progression was assumed from the first period on.
Model (7) can be estimated directly by assuming suc-
cessive values of Ai and A2 and selecting the pair of val-
ues that maximizes R-. The geometrically weighted av-
erages of (7) were calculated as follows:
(9)
, , , ^ \,ST
122
JOURNAL OF MARKETING RESEARCH, MAY 1972
These expressions, included in the regression equation
as independent variables, were fairly good approxima-
tions, because A' decreases rapidly as i increases. The
transformed variables were computed for values of Ai
from 0.5 to 0.9 and Aa from 0.1 to 0.9. A total of 45 pos-
sible combinations were computed for each brand.
Regression Results
Several alternative market share functions were esti-
mated by OLS from historical data. The most repre-
sentative regression results obtained for the brand stud-
ied are in Table 1.
The R-'s and the f-ratios were highly significant, but
the best fit was obtained with M-3 and M-5. The re-
gression coefficients had the expected signs, and most
were significant at the .05 level or higher. The Durbin-
Watson statistic for serial correlation was at an accept-
able level in M-5, suggesting that residuals were inde-
pendent. Examination of the distribution of residuals
led to the same conclusion for M-3. The matrix of the
last-order partial correlation coefficients showed that
collinearity among independent variables was not a seri-
ous problem, particularly for M-5. As indicated by the
lower R'-. r-tests. and Durbin-Watson statistics, the best
fit was obtained with the linear form. Seniilogarithmic
forms in the advertising variables were also estimated,
but without significantly modifying the overall picture.
However, for planning purposes semitog models, be-
cause of their robustness, are generally preferred to
hnear models.
Regarding the distribution variables, there were large
differences between the DS^* and DO,* coefficients,
and the highest contribution to the reduction of total
variance was made by service station share. The con-
tribution of advertising and the presence of lagged ad-
vertising effects were clearly established. The coeffi-
cient of the lagged dependent variable was always highly
.significant and between zero and one. as postulated by
the underlying model. These results indicate that there
was a dynamic demand structure in this market, con-
firmed by the fact that M-5which is (7)was highly
significant, and the best fit was observed for values of
Al and X-2 equal, respectively, to 0.7 and 0.5.
A graphic comparison of actual and calculated market
shares for model M-3 is also made in Figure 2. It seems
reasonable that M-3 and M-5 are statistically reliable
and give a good description of the market mechanisms
[13].
ViifiahU's
Conslant term (k)
Service station share (DS,*')
Other outlets' share (DO,)
Advertising shares [STt*]
STl,
STU
Lagged market share (MS,-i)
Service station good will
CO
Advertising good will
f-ralio
d.f.
Durbin-Watson statistic
Linear
{M^D
0.0720
(O.OI57)
0.1969
(0.3758)
0.0267
(0.17(.)0i
0.0397
(0.0I5I)''
0.0651
(0-0146)"
(0.0382)
(0.0131)"

0.8836
43
5,23
1.1098
Tabl e
REGRESSION
DotibU' log
{M-2)
0.8703
(O.2OI4)
0.1517
(0.2809)
0.0715
(0.1742)
0.0298
(0.0141)^
0.0570
(0.0143)
0.0309
(0.0150)-

0.8683
37
5,23
1.0995
1
RESULTS
Regression models
Linear
(M-3)
0.0292
(0.0066)^
0,7236
(0,1760)^
0.0436
(0.0818)
0.0396
(0.0079r
0,0350
(0.0086)"

0.7016
(0.0875)''
0.9629
151
5,24
2,4263
Double log
iM-4)
0.3666
(0.1289)"
0.5945
(O.2O3O)
-0. 0063
(0.0979)
0.0354
(0.0086)"
0,0291
(O.()]O2)''

0,6446
(0,1049)"

0,9486
108
5,24
1.8156
Linear
(MS)
-0. 0624
(0,0099)"

0,1230
(0.0848 )>
0,0315
(0,0071)"
0.0598
(0,0070)

0,7070
(0,0896)
0,0558
(0,0102)"
0,9605
122
5,20
1.9253
Standard errors are in parentheses. Significant at the .01 level.
Significant at the ,10 level.
Significant at the .05 level.
Not included in lhe model.
A COMPUTER ON-LINE MARKETING MIX MODEL 123
SIMULATION OF MARKETING STRATEGIES
The usefulness of an econometric marketing model
lies in its capacity for simulating alternative marketing
strategies, since real world experimentation is often dif-
ficult to implement and always limited in alternatives
A simulation model does not require precise data,
since it incorporates the decision maker's best judg-
ment. Thus the model offers an opportunity to com-
pensate for the shortcomings of the traditional econo-
metric approach. With an econometric model, in
addition to the usual pitfalls of coliinearity, serial cor-
relation, and two-way causation [20], more fundamental
restrictions must he placed on applicability to future pe-
riods. The most important restrictions are:
factors constantly come into play (e.g., entry
of new competitors), and the relations used in the
past may no longer be valid.
2, The mode! must be adapted to changing reUuions.
For example, a linear function for advertising may
provide a good approximation for the period of ob-
servation but may prove entirely inadequate for pre-
diction.
3. The estimated equations usually do not incorporate
qualitative factors, although changes in the level of
technical elTiciency of a marketing instrument (e.g..
new advertising theme) may have a significant im-
pact on the slope of the response function.
By adopting a simulation program in which regression
coefficients are viewed as prior estimates to be adjusted,
forecasts can be generated which are not simple extrap-
olations of fhe past but which also reflect best judg-
ment and information. Simulation programs written in a
conversational mode greatly facilitate man-machine in-
teraction [15]. The name of fhe program used here,
SIMAREX, stands for Simulation of MARketing EX-
penditurcs.
Description of SIMAREX"
The simulation process has two stages: backcasting,
in which predictive reliability is tested on past data, and
planning, in which alternative strategies are evaluated.
These are described in detail in fhe fiow diagrams of
Figures 3 and 4, which are largely self-explanatory ex-
cept for the updating of regression coefficients.
Ideally, the estimates would be updated in a formal,
or Bayesian. sense. Here, however, the updating is in-
formal for the sake of simplicify and so that fhe decision
maker can become more directly involved. The regres-
sion model is first updated with current period results,
and coefficients are adjusted by trial and error to pre-
cisely reproduce actual market share as model output.
To assist the decision maker, three sefs of index num-
bers have been developed: (1) an advertising creativity
and communication value index (ACC), (2) a retail net-
work productivity index (RNP), and (3) a point-of-sales
promotion index fPSP). The reference value was one,
Figure 3
FLOWCHART OF BACKCASTING PHASE
Ki-i;rL'Ssiiiii Mod^l
IiipiJT Data Last l-oiir
,--ti Niimlvr iif I.mips (nl
Is 11
CAW siandard
> 1 r
deviation for
Run the Simulatiiiii Proj;rani
Owx At-lLial anJ CalcLiIalfd Markot Sliar
Aciiial-i'iirt'cast
Mean Deviauun :
, Niinibcr oi Forccasls
Clit'ck Distrilmuoii of
Vali
u'li h'f r :aiiSL's .if Df
Go hack to a or c *
Ready to ijtarl Forei'astinj;
and positive and negative deviations were subjectively
estimated, with upper and lower limits calculated by
reference to the highest and lowest advertising coeffi-
cients for the main competing brands. The RNP index
was estimated directly by regression analysis, and the
PSP index combined duration, geographical coverage,
estimated costs, and creative value of the promotion.
This information was provided regularly by a market
research firm, with samples of the promotional material
used.
The results of fhe backcasfing are in Figure 5. The
base regression mode! is M-3, fitted fo the observations
of Periods 1 to 21 and 1 to 25, respectively. Each regres-
sion equation was used in turn to predict market shares
124 JOURNAL OF MARKETING RESEARCH, MAY 1972
Figure 4
FLOWCHART OF PLANNING PHASE
\Miluii lhe i,hi3sen planning Iuni7.on. give fur brand i cxpeLied Inioai
pessiniislik; (0,10). and upiimiMii,-(0.40) values Unihe followjne
marketing variables:
nuinher of service stations
- number of olher tmliels
-advertisingpressure in: press (SPl, radin (SR).TV(SVl, jiui ni(al
advertisiiig(ST)
relail priue(PK)
Wiihin the same planning Imri/on, give expected, pessimisiic, ami
optimistic values for the same marketing vuriuble^ for all competing
brands:
- total nuniher of service stalJuns ( I DSI
- lotal number of uthev oullets (i^ 130)
- total jdverrising in press, raJJo.und TV ( I STl
-average market price (av, i'R)
Define u sjiecific marketing stralegyj for hraiiJ i in J specific coitipetitive
environment k
(iivc Siaiidard Deviation tor Reeiessioii (\ietlicicnts
Run ilie Siimilatiiin Program
ll
Print out input data, regression uoetficieLits e,\[iecied market slimcs.
expected sales volume per period and otitlei categi.>ry with staruLiid
deviation if n > I
Program Pause: Kvaluate Restilts
Is I ,\ k strategy the last stiatci;y'
for Periods 21 to 29 and 32 respectively. Deviations
from aetual values were summarized by a measure of the
average percentage deviation. The mean pereentage
error was at its lowest with M-3 to M-25 and repre-
sented about half a percent of the average value of
market share. Also, the distribution of residuals was
satisfactory.
The planning phase can consider 20 periods and can
be modified at each period. Nine marketing programs
were considered, including conservative, moderate, and
aggressive marketing mixes with minimum, nonnal, and
maximum competitive environments. The initial mar-
keting mix was nonadaptivc, held constant in all 20
simulation periods. Other decision rules could be
adopted for adjustments in each period [8].
Table 2 shows the questionnaire generated at the
computer terminal, using a search option which allows
change of the regression coefficients and/or the stand-
ard errors of each marketing variable and introduction
of new parameters. For each new set of parameters (or
strategies), a new print-out is obtained. Sensitivity anal-
yses, changes of input data, and updating of regression
coefficients are easily done.
The program's flexibility enables the decision maker
to simulate many alternative strategies and to analyze
immediately the predicted outcomes. As a result of this
analysis, a series of revised programs, reallocations of
the marketing budget, or possible new competitive re-
actions are discovered and simulated. Thus risks are re-
duced, since changes in the current program can be
adopted more rapidly in response to an anticipated event
or market reactions. The firm is thus likely to take ad-
vantage more rapidly of new market opportunities.
Implementation Problems
The model is gaining acceptance and credibility within
the oil company's marketing department. Application to
other geographic markets has already started. Model
development took approximately two years; the project
was under the direct supervision of the operations re-
search group of the company's head otfice, and received
continuous support from management. Direct involve-
ment by marketing practitioners in the model building
Fi gur e 5
TEST OF PREDICTION: ACTUAL VS. PREDICTED
MARKET SHARE
20 21 iZ 2i 24 26 6 27 ZB 9 30 31
A COMPUTER ON-LINE MARKETING MIX MODEL
125
Table 2
COMPUTER TERMINAL QUESTIONNAIRE
TYPE IN 1 FOR NEW SET OF PROBLEM DATA BY CARDS
2 FOR NEW PARAMETERS BY TYPEWRITER
3 FOR NEW STRATEGIES BY TYPEWRITER
It BOTH PARAMETERS AND STRATEGIES BY TYPEWRITER
5 FOR PROGRAM PAUSE
6 FOR PROGRAM STOP
r eady f o r dat a C80 c o l )
It
FORMAT REQUIREMENTS
ALL VALUES MUST BE ENTERED WITHIN THE 80 COLUMNS.
ENTRIES ARE SEPARATED BY ONE OR MORE BLANKS.
ALL DATA MUST CONTAIN A DECIMAL POINT.
SIGN * IS OPTIONAL.
TYPE S (LOWER OR UPPER CASE) FOR SKIP AN ENTRY .CONSECUTIVE SKIP (S) NEED NOT BE SEPARATED BY BLANKS.
IF AN ERROR IS MADE WHEN TYPING, CANCEL CALTN 0) AND RE-TYPE IN ALL THE VALUES.
WHEN ALL VALUES HAVE BEEN TYPED IN,TYPE IN EOB CALTN 5). EOB WILL SKIP REMAINING ARGUMENTS IF ANY.
NUMBER OF LOOPS
ready for data (80 col)
50.
NEW PARAMETERS
CONSTANT TERM K AND $D[K)
ready for data (80 co1 )
LAGGED MS
ready for data (80 cot)
-0.0167 0.0205
A AND SD(A)
0.728 0.0875
Bl AND SDCBl) OTHER OUTLETS B2 AND SD(B2) SERVICE STATIONS
ready for data (80 co1 )
0.}9i 0.0283 0.072 0.0065
ADVERTISING 1 TO ii (IF NECESSARY) CI AND SD(Cl), C2 AND SD(C2), C3 AND SD(C3), Ci. AND SD(C[t)
ready for data (80 col)
0.03S1 0.0079 0.0201 O.0OS6
PRICE F AND SD(F)
ready for data (80 col)
IF FIRST VALUE ENTERED AFTER READY FOR DATA <80 COL) IS 999.999,ALL REMAINING PERIODS WILL BE SKIPPED
ADVERT.2 ADVERT.! ADVERT.It (IF NECESSARY) PERIOD
1970 - 1
ready for data (80 col)
1970 - 2
ready for data (80 col)
1970 - 3
ready for data (80 col)
1970 - U
r eady f o r d a t a ( 80 c o l )
1971 - 1
ready for data (80 col)
999.999
NEW STRATEGIES
PRICE * SERV.STATIONS * OTHER OUTLETS - ADVERT.!
8.
8.
8.
8.
8.
8.
and data gathering process has certainly been a decisive
factor in the success of the project.
Regarding implementation difliculties, the first ac-
ceptance to be obtained by the researcher from the man-
ager is that it is feasible to model the market. Extensive
backcasting was the key factor in this case: management
was impressed by the excellence of the fit and also found
in the econometric results confirmation of previous ob-
servations. Once general agreement has been reached, the
philosophy proposed must be reconciled with the manag-
er's perception of the market, since the model should be
adapted to the needs of the primary user [15]. Thus, in
this instance, the advertising manager was first very re-
luctant to cooperate. He was mainly concerned with
creativity and qualitative aspects of advertising, which
were not directly within the purpose of the exercise,
since the model was designed to evaluate the efficiency
of advertising expenditures with respect to the other op-
tions available. The advertising creativity and communi-
cation value index, although difficult to construct, has
given the advertising manager the opportunity to express
his views and therefore to participate constructively.
Finally, a manager may feel that introduction of a
complicated model implies that he is not performing his
job competently. Therefore, it is up to the researcher
to demonstrate that he is bringing something extra to
the resolution of a problem. In this case, hard budget
constraints and the necessity to carefully justify market-
ing expenditures finally convinced management that it
was worthwhile to use the model. Management's use of
the model has since increased drastically.
CONCLVSION
The approach described here is in fact ver>- similar
in scope to the Bayesian approach, since managerial
subjective judgments are incorporated. One significant
126
JOURNAL OF MARKETING RESEARCH, MAY 1972
difference, however, is that here empirical estimates
come first in updating input parameters. Thus the deci-
sion maker at least has objective measurements to start
whieh summarize the brand's past history. With continu-
ing improvement of information systems within the firm,
the quality and reliability of these econometric esti-
mates will certainly increase and provide management
with more empirical information on which to base judg-
ment. It seems very unrealistic, indeed, to expect judg-
mental estimates of the different response coefficients
from the decision maker, even if he is very well in-
formed, without giving him some organized prior in-
formation or reference values.
The most interesting and promising feature of this
approach is more its contribution to learning than the
fact that responses are delivered in seconds. An on-line,
conversational model can be viewed as an accelerator
of managerial thinking which provides the decision
maker with new insights into the interrelated structure
and implications of a marketing deeision.
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