Figure 1: Motion Theory of Markets, Performance and Marketing ...

Koen Pauwels Towards a Motion Theory of Marketing 4/7/2004 

Figure 1: Motion Theory of Markets, Performance and Marketing Action 

Market Forces 

• Customer Learning 

and Imitation 

• Customer Inertia, 

Market Saturation 

• Supply Chain Actions 

• Socio-economic trends 

Pull in 

Motion 

Put to 

Rest 

Performance 

EVOLVING 

STABLE 

Offensive: 

Push in 

motion 

Defensive: 

Maintain 

Year after year, managers strive to improve their performance in ever changing 

markets. Faced with customer inertia, competitive reactions and market uncertainty, they 

are looking for marketing actions that yield long-term benefits to the company. CEO 

statements often reflect this rationale, in industries ranging from manufacturing 1 to 

services 2 to fast moving consumer goods 3 . Long-term marketing productivity permeates 

recent discussions on the profitability of Internet-based services, on downturn spending 

cuts, on building and maintaining brand equity, and on market entry strategies. The 

measurement and improvement of long-term financial returns to marketing investments 

continues as a top research priority of the Marketing Science Institute. Addressing this 

priority requires a dynamic understanding of the conditions for performance growth and 

of the role marketing actions play in this process. Existing theories of market dynamics, 

such as diffusion of innovation and life cycle theory, postulate deterministic changes over 

time, which are unrealistic in today’s uncertain market environments. Therefore, I 

propose a motion theory of marketing, as summarized in Figure 1. 

Marketing actions 

Market Entry (M&A) 

Positioning (STP) 

Product 

Price 

Distribution 

Communication 

1 Chrysler’s CEO Dieter Zetsche maintains that his forecasted sales gain of 1 million cars in the next 5 to 

10 years “will be driven by 12 new product introductions in the next three years rather than by low pricing” 

(J. D. Power and Associates 2002) 

2 In May 2001 (Wall Street Journal), America Online raised prices to meet its aggressive financial targets 

based on the company's confidence that the move would not compromise its growth in consumer base 

(164% since 1998) nor its growth in usage depth (52% since 1998). Bold? Maybe. Unwise? Certainly. 

3 Despite saturated demand and strong competition, "Coke is sticking by its ambitious growth targets and 

believes that they can be reached "over the long-term” (Wall Street Journal, November 16, 1999) 

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Basic Elements of the Motion Theory of Marketing 

Application of the Motion Theory requires us to answer a few questions: 

1) The Performance Question: where are we heading, what is the long-term outlook? 

General answer: “baseline” forecasting as backbone of management action planning. 

Motion answer: identify and analyze performance regimes (see p. 3, and Pauwels 2001) 

2) Profitable Growth Question: Are we satisfied or not with were we are going? 

General answer: If so, don’t do anything (management by exception or thermostat), if 

not, use marketing actions to close gap between desired future and baseline performance 

Motion answer: If so, continue to pump the market for temporary, but profitable benefits 

(e.g. price promotions or minor product modifications). If not, a marketing policy change 

is needed to push performance into motion (see p. 5). Business as usual just won’t do. 

3) Marketing Question: how to change our destiny; how to improve where we are going? 4 

General answer: increase marketing actions with the best “bang-for-your-buck”, i.e. 

combining high performance impact (elasticity) with cost efficiency. Performance 

benefits are typically estimated by a static model such as regression, logit, etc. 

Motion answer: The needed policy changes may differ from marketing actions with the 

highest elasticity and efficiency in stationary regimes and their long-term costs (including 

competitive reaction and needed maintenance spending) should be weighted against their 

long-term benefits: pushing performance towards a more favorable regime (see p. 5-6) 

t 4 A trend is a trend, is a trend, but the question is, will it bend? 

Will it alter its course, through some unforeseen force, and come to a premature end? 

Sir Alec Cairncross, chief economic advisor to the British government 

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Performance Regimes 

Performance regimes can readily be classified by their managerial desirability, based 

on two dimensions: the direction of change (i.e. growth is better than stagnation, which is 

better than decline), and the uncertainty around this change (i.e. lower uncertainty is 

better than high uncertainty for improving conditions, and vice versa). Modern time- 

series analysis can diagnose direction as well as uncertainty: a deterministic trend reveals 

the direction of change, and a stochastic trend reveals the uncertainty around the future 

direction of performance. If there is no stochastic trend, then performance is stationary, 

i.e. all observed fluctuations are temporary deviations from a deterministic component, 

which may include mean, trend and seasonal cycles. Stationary behavior implies that 

future performance is relatively predictable, as the expected forecasting error gently 

increases with the forecast horizon. In contrast, the presence of a stochastic trend or unit 

root implies that sales performance may move widely apart from any previously observed 

level, with a variance that increases in time. 

Table 1: Classification of performance regimes, ordered by managerial desirability 

Deterministic trend 

Stochastic trend 

Stationary Evolving 

Positive Deterministic Growth (#1) Stochastic Growth (#2) 

None Static Equilibrium (#3) Random Walk (#4) 

Negative Deterministic Decline (#6) Stochastic Decline (#5) 

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Table 1 combines the managerial desirability of a performance regime with observable 

conditions in the data. Deterministic growth (#1) and decline (#6) are, respectively, the 

best and worst-case scenarios. Performance evolution adds uncertainty and therefore 

attenuates the good news and the bad news. Finally, in the case of no deterministic trend, 

risk-averse managers typically prefer a static equilibrium above a random walk. 

When would we expect to observe performance stability and evolution? Table 2 lists 

several factors outside and inside the control of market players (firms and consumers). 

Table 2: Reasons for evolution and stability in performance 

Evolution Stability 

Co-movements of performance with 

macro-economic variables 

Growth stage in the product life cycle 

Changing marketing effectiveness 

Consumer learning 

Changing consumer tastes 

I. Factors outside the control of the market players 

Positive feedback sales & retail distribution 

Performance feedback 

Error-correction towards performance goal 

Competitive quest for more in budgeting 

Breakthrough changes in marketing 

strategy or practices, which are not quickly 

matched by competitors 

Government regulations that limit company 

growth and/or bankruptcy options 

Maturity stage in the product life cycle 

Stable marketing effectiveness 

II. Behavior of consumers and retailers 

Consumer Forgetting 

Consumer inertia 

III. Management decision making 

Retailer inertia & assortment commitment 

Normative marketing decision models 

Satisficing managers 

Fixing marketing budgets as sales ratios 

Interdependent adaptation with competitors 

enables fast competitive cancellation of 

marketing effects 

4


Research postulates (RP) and marketing spending (MS) rules 

RP 1: Performance Evolution occurs in specific time windows between stable regimes 

Why? Stability is the natural state of the market performance because of consumer habit 

persistence / inertia and competitive vigilance. 

MS rule 1: your budget allocation should vary with the growth path of performance 

RP 2: In mature markets, these evolution periods are short relative to the stable periods 

Why? Punctuated equilibrium theory applies to markets: you can only change customer 

behavior in a few short-lived circumstances that engage customer learning, before 

customer inertia, market saturation and/or effective competitive reaction make this 

growth grind to a halt. 

MS rule 2: use your money first on marketing actions that co-evolve with outcome series 

RP 3: Marketing actions and policy shifts have different effects on performance regimes 

Why? In stable performance regimes, you can continuously improve marketing efficiency 

and perceived customer value by product modifications, price promotions, point-of- 

purchase efforts and reminder advertising. However, these business-as-usual marketing 

actions do not have the power to put performance in motion towards a better regime. 

If you want to push performance in motion, you need a change in marketing policy. A 

major new product introduction, a sustained price decrease, a new distribution channel 

and innovative advertising have the potential to push performance in evolution and create 

permanent effects by enabling performance to stabilize at a new, higher equilibrium level. 

MS Rule 4: marketing policy shifts are needed to push stable performance into motion 

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RP 4: Return on Marketing Investment differs in different performance regimes 

Why? Unexpected actions that disrupt consumer expectations and habits are possible, but 

hard to pull off: they often require creative, integrated and expensive marketing changes. 

However, when performance is already evolving, i.e. consumers or retailers are learning, 

usual marketing actions may help push it along. For instance, printer manufacturers enjoy 

permanent advertising effects when their product is clearly superior to the competition. 

MS Rule 4: focus your marketing efforts to lift performance that is already evolving 

References 

Academic references were omitted for readability; they can all be found in: 

Pauwels, Koen (2001), Long-Term Marketing Effectiveness in Mature, Emerging and 

Changing Markets, Ph.D. Dissertation, The Anderson Graduate School of Management, 

University of California, Los Angeles. 

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Figure 1: Motion Theory of Markets, Performance and Marketing ...

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