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Return on marketing investment: Pizza Hut Korea’s case

Sungil Lee Seoul School of Integrated Science and Technologies, Seoul, Korea and

Pizza Hut Korea, Seoul, Korea, and

Shijin Yoo Korea University Business School, Seoul, Korea

Abstract

Purpose – The purpose of this paper is twofold – the first is to explore the key actions that enabled Pizza Hut Korea (PHK) to come out of a nine-year decline in sales and profits. The second purpose is to delve deeper into the concept of return on marketing as applied to the turnaround of Pizza Hut Korea, using customer lifetime value (LTV) and the related return on marketing investment (ROMI) principles that were instrumental in turning around the business.

Design/methodology/approach – The main method used is interviews with company senior management, reviews of internal company data as well as external data and literature reviews of existing theories on return on marketing. The case uses a specific promotional decision that senior management must make to review the decision methodologies using return on marketing. This quantified return estimate is then combined with marketing and business strategic considerations to review the decision that management should make regarding the promotion. In addition, the detailed executive interviews shed light on the approaches taken by the senior management to effect a change in culture as well as the disciplined business reviews that were put in place to improve the financial performance. Finally the case describes the marketing insights that led the firm to implement their consumer promotions to help turn the business around.

Findings – Turning around a business that has been in decline for a long time requires not just keen consumer insight and excellent marketing tactics, it is a combination of changing the culture of the company and mindset of the leaders along with instilling disciplined financial processes and driving consumer insight driven strategies. In particular, this study focuses on the role of quantified marketing investment return model that helped to drive a fact-based, data-driven decision-making process that, combined with strategic insight, helped to turn the business around. The lifetime value and return on marketing investment model employed by Pizza Hut Korea provides a starting framework for analyzing marketing investment returns that can be adapted by many other companies.

Originality/value – Though there has been research conducted in many turnaround situations, there has been virtually no work done to examine the turnaround strategies employed using key marketing return metrics. In addition, the study provides value in that it examines the totality of management principles employed (cultural, organizational, financial, marketing) to drive innovation and change. This study will be useful for those that seek to better understand the key principles involved in turning around a business but with particular emphasis on quantified marketing returns analysis using return on marketing investment method.

Keywords Marketing strategy, Promotions, Customer lifetime value, Return on marketing investment, Catering industry, South Korea

Paper type Case study

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0025-1747.htm

Because this case deals with an ongoing business situation with Pizza Hut Korea, some data have been omitted or modified for confidentiality reasons.

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Management Decision Vol. 50 No. 9, 2012

pp. 1661-1685 q Emerald Group Publishing Limited

0025-1747 DOI 10.1108/00251741211266741

Introduction One of the biggest frustrations facing marketers and CEO’s of companies is the inability to quantify the effectiveness of marketing spending. Executives understand and accept that the company’s products and services need to be advertised and promoted in order to generate sales. The issue is what is the appropriate amount to spend and how does one determine whether the returns justify the spending? Because of the inability of marketers to quantify the benefits of the marketing budget, this is the first item to be cut near the end of the fiscal year when the company has difficulty meeting its profit objectives. The marketers have a difficult time justifying why the budget should not be cut as they cannot demonstrate, in quantifiable terms, what is the exact loss to the company as a result of the budget cut. In particular, this problem is exacerbated if the company is undergoing declining sales and profits. When a firm is not performing well, the senior executives try to protect the bottom line by cutting variable expenses first – with marketing budgets invariably becoming the first target. The immediate impact is not visible and other expenses, such as people, are much more difficult to reduce quickly.

Not much research has been done that have used specific examples of marketing performance measurement in a turnaround situation. This paper attempts to address this issue by looking at the paper of Pizza Hut Korea. Pizza Hut Korea had been a successful business from its introduction in 1985 to the early 2000s. Since then, it has experienced declining sales and loss of customers. A new CEO has joined the company in early 2008 and has implemented many changes to turn the business around, including a disciplined marketing performance measurement tool called Return On Marketing Investment (ROMI). This paper uses interviews with company senior executives, internal data covering sales and performance information as well as extensive consumer research data, and external data to compile a perspective on the relationship of marketing performance measurement and its role in helping to turn around a declining business (Pizza Hut Korea, 2002-2011, 2011).

A detailed analysis of the methodology used by Pizza Hut Korea to calculate Customer Lifetime Value (CLV) is reviewed, as this is the first step to calculating the Return On Marketing Investment. The approaches taken by the senior management to address the organizational issues and how that relates to the quantified marketing performance measurement techniques used is explained. There is detailed discussion of the initiatives taken by management to turn around the business including mindset shift, various marketing initiatives to drive value and improve taste perception as well as make all of the management much more financially accountable. The role of how a quantified marketing performance measurement tool has helped to drive more insight and fact driven decision making and its importance in turning around the business is explored.

The objective of this paper is to provide a forum to begin to think more quantitatively about how we measure the impact of marketing spend to help improve business performance. The hope is that this will spur more research covering other methodologies and industries in order to continue to improve our understanding of marketing performance measurement.

Situation summary In June of 2011, President S of Pizza Hut Korea (PHK), was pondering his next move. He was tired from two and a half years of relentless focus on trying to turn around the declining trend of Pizza Hut. At the same time, President S was excited because he was

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finally beginning to see the fruits of the efforts of the past two and a half years in business performance. As President S reviewed the latest financial statements for the month of June, he was wondering how far he could take the business to achieving the former glory of the once high flying Pizza Hut brand in Korea.

President S was hired in early 2008 to turn around the flagging sales and profitability of PHK. The business had undergone a steady decline in customers and transactions since 2002. Competitors had taken a significant amount of share from Pizza Hut and were building strong brands at the expense of Pizza Hut. The pizza industry in Korea seemed to have reached saturation point and there was intense competition for market share in a slow growing category – hence negatively affecting profitability.

Marketing Director Y and Operations Director J had asked to meet with President S to discuss the pending promotional plan for August. The current promotional plan for August was a series of promotional tie-ins with partner companies offering various incentives and discounts to drive sales of their premium line of pizzas. President S did not feel the promotional ideas sufficiently leveraged the current success of their new pizza, “The Special” and may not be enough to continue the positive momentum. The Special, after its launch in May, had achieved outstanding positive sales performance in May for the delivery channel, which accounted for 55 percent of the business. However, in July, competitors were expected to respond with aggressive pricing as well as launch new premium pizzas with heavy TV advertising support, outspending Pizza Hut by two to one on media. As a result, it was felt that July sales would be slow and that Pizza Hut would need to be more aggressive in August in order to continue the positive momentum during the peak summer holiday season.

President S had asked the two directors to re-review the existing promotional plan for August as the President felt it was not strong enough. In particular, the President asked the two directors to consider a value oriented “Pair Deal” promotion where a significant discount would be given if a customer ordered two pizzas instead of the usual one pizza. The Special was a range of five pizza toppings on top of a dough that was soft yet chewy as well as being less oily. Feedback from customers was that they tried The Special because of the low price (15,900 Korean won (won, hereafter)[1] for one versus the normal price of about 25,000 won for a typical pizza from Pizza Hut) but came back because of the great taste of the pizza. Consumers commented favorably on the great taste of the dough as well as the quality and taste of the various toppings.

Marketing Director Y said that the Directors could not agree on whether to proceed with the Pair Deal promotion for August. She said both directors had different opinions and their staff were also split as to whether to proceed with the Pair Deal promotion. She said her recommendation was to not proceed with the Pair Deal promotion. Marketing Director Y stated her arguments as follows:

My marketing team are split evenly on whether to proceed with the Pair Deal promotion in August. The supporters say that this is our chance to get as many consumers as possible to try our great new taste and that we should be very aggressive with price to get customers to try the product as they will become repeat customers based on the excellent taste of the product. The opponents argue that the product is already attractively priced at 15,900 won per pizza (versus the usual price of 25,000 won for the same sized premium pizza) and that by discounting it further through a Pair Deal (2 for 25,000 won), we will hurt the value and image of the brand unnecessarily. After listening to both sides of the argument, I am recommending that we not proceed with the Pair Deal due to concern on brand image.

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Operations Director J was in favor of running the Pair Deal promotion. He stated his position with the following arguments:

My operations managers are also split evenly on whether to run this promotion or not. There are merits to both sides of the argument. However, I have come to the conclusion that it is better to proceed with this promotion. Under normal circumstances, I would not recommend we proceed. However, the key difference here is the fantastic quality of the product and the great response we are having from our consumers. They love the taste of the new dough. If the product did not perform as well as it does now, I would be reluctant to run such an aggressive promotion during our traditionally strongest month of the year. But because the product tastes so good, I don‘t believe consumers will form a negative image based on the low price. Once they try The Special, I think consumers will be hooked and become loyal. Therefore, I believe we should aggressively promote The Special in order to attract new users and make them loyal Pizza Hut customers.

President S saw merit in both points-of-view and said he wanted each director to think further about the arguments each side has made. In particular, he wanted the two directors to first calculate the quantified return on marketing investment (ROMI) of running the Pair Deal promotion and then to make a recommendation based on both the ROMI data and strategic considerations. He asked them to also take into account other strategic factors, such as the consumer research findings and potential competitive responses.

Business overview The business in June of 2011 had achieved the highest profit in both dollars and margins in the last five years. Same Store Transaction Growth (SSTG – Transaction growth versus year ago for stores open during the last year), a key indicator of business health, was on the increase for the first time in nine years. Moreover, consumer satisfaction with The Special was very high and repeat purchase intent was extremely high. The strategy to better understand key consumer insights that were driving existing Pizza Hut customers away seemed to be working and consumers that had abandoned Pizza Hut for competitors were beginning to show signs of returning. However, future prospects for the return to the “glory days” of high growth and profits were not looking good. The growth rate of both the Western dining market and pizza category had slowed to a crawl over the last several years and future prospects for healthy growth was not promising.

Faced with these challenges, President S pondered his next move. He realized that of the various key success factors in turning around the business, he needed to focus even more on clearly understanding and identifying the key variables that are critical to attracting and retaining customers. He needed to have a clear idea of the role that price plays in driving additional customer traffic to stores and what the key factors are that will lead to long-term growth for Pizza Hut.

Pizza market in Korea Pizza market The overall Pizza category in Korea is over-penetrated as of 2010. Based on comparison data of pizza restaurant units per capita, Korea ranks the highest among countries with similar economic development (Figure 1). Korea has 28 pizza restaurant units per million people, the highest in the list of countries with similar or higher GDP per capita. Hong Kong is 3rd with 23 units, and Singapore is in 4th place with 15 units.

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Competitive situation The total pizza market in Korea is estimated to be Won 1,200 trillion won in 2010. The majority of the category is dominated by the 3 premium brands of Pizza Hut, Mr Pizza and Domino’s Pizza that is estimated to have 76 percent market share. The leading pizza brands are priced roughly on par, while the next tier brands (Papa Johns and Pizza Ettang) are priced about 10-20 percent below the premium brands. The other brands are primarily Mom and Pop pizza brands that provide take-out pizza at 40-50 percent below the premium pizza prices. This is summarized in Figure 2.

Pizza Hut was the first premium pizza brand to launch in Korea in 1985 followed by Dominos and Mr Pizza in 1990. Both Dominos and Mr Pizza follow the franchise model while Pizza Hut has a mixture of company owned (equity) stores and franchise stores. Dominos competes only in the delivery category, while Mr Pizza competes in both Dine In and Delivery segment with Pizza Hut.

Mr Pizza is the only premium Korean brand and it initially copied many elements of Pizza Hut’s strategy, including the products, store design, layout, operations standards and marketing strategy. However, it was not until the early 2000s that Mr Pizza began to make serious market share inroads by positioning their brand squarely at the main western dining user of young women in their 20s. They adopted the slogan “Mr Pizza – for Women” and hired a local female celebrity to be their spokesperson on their TV

Figure 1. Pizza category in Korea is

over-penetrated

Figure 2. Korea total pizza market

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commercials (TVCs). They also introduced more toppings geared toward young women (especially seafood toppings) and ran many women-oriented promotions and discount offers. Such a strong, young women focused strategy made sense for Mr Pizza since the vast majority of decision makers for western dining are young women in their 20s. Due to the success of this young women oriented strategy, Mr Pizza grew rapidly and by mid-2010, they had 390 restaurants in the country.

Dominos Korea has focused on the delivery business, consistent with their global strategy. They are run by a master franchisee that deals with the local franchisees and supports the franchisees with new products, IT support, marketing, R&D and supply chain logistics. By mid-2010, Dominos had 340 stores in the country.

Pizza Etang and Papa Johns are the non-premium delivery brands while the local mom and pop stores mainly provide only pick-up service. The mom and pop stores go after the neighborhood consumers and students who want cheap, filling pizza while Pizza Etang and Papa Johns are positioned in-between the premium and mom and pop pizza stores.

Rise and fall of Pizza Hut Korea Early keys to success Pizza Hut is part of Yum! Brands (YUM), a listed company on the New York Stock Exchange. YUM’s portfolio of restaurants includes KFC and Taco Bell in addition to Pizza Hut. As of the end of 2009, YUM has over 40,000 restaurants in 110 countries and over 1 million employees with sales of $9.4 billion. The company is the leading brand in restaurants with the vision of “Building the Defining Global Company That Feeds the World.”

Pizza Hut entered Korea in early 1985 with the first store in Itaewon. It was initially started as a joint venture with Seong Shin Jae as the local partner having 49 percent equity and the parent company (Pepsi-Cola Company) holding 51 percent. At that time, there were almost no Western dining restaurants in Korea and Pizza Hut received heavy consumer support. In 1991, Pepsi bought out Mr Seong and became a 100 percent foreign equity owned business. The business then expanded rapidly and grew to 100 stores by 1996. In 1997, the restaurant division of Pepsi-Cola was spun off and Pizza Hut Korea became a subsidiary of Tricon Restaurants (owner of KFC, Pizza Hut and Taco Bell). Korean consumers welcomed the pizza innovations that Pizza Hut introduced in Korea including Cheese Crust Pizza (as the name implies, string cheese is rolled in the edge of the pizza) in 1996. In 2002, Pizza Hut introduced a major product innovation using sweet potato as a topping on the edge of the pizza called Rich Gold Pizza. This was an instant success and has sold more than 40 million pizzas since its introduction. This was also the year when Tricon Restaurants changed its name to Yum Restaurants. By 2005, the number of restaurants in Korea had grown to 341 stores. Pizza Hut continued to lead product innovation with bite sized edges on the pizza called Cheese Bite Pizza as well as Mini Pizza (six inches) for single-person consumption. These innovations built on the ideas from the global markets and were modified to appeal to Korean tastes.

The keys to early success were: . sufficient capital to expand rapidly to take early advantage of consumers’ desire

for pizza restaurants;

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. building on product successes from international markets (e.g. pan pizza, cheese crust); and

. localizing the toppings to suit Korean consumers’ preferences (e.g. Rich Gold, Bulgogi).

Sales also grew rapidly during this time and reached a high by 2004. Staff count grew to over 7,000 employees by 2005.

Decline and key challenges After going through such rapid growth, the business growth began to slow from 2002. The key reasons for the decline were the increasing number of competitor stores, rising income levels leading to willingness of consumers to try more upscale casual dining restaurant concepts (e.g. TGIF, Outback Steakhouse), and last but not least, the mismatch between value and price where consumers felt they were not receiving appropriate value for their money (Figure 3).

In fact, this value perception was not unique to Pizza Hut but was a category problem. These factors combined to reduce the brand equity of Pizza Hut over several years.

Smart Lunch and Fresh Delight – value initiatives Data gathered from various research, led the management team to decide to focus on Smart Lunch for weekday lunch and Smart Dinner for weekday dinner. The word “Smart” was the umbrella brand for value oriented offerings but the two offerings were designed to meet very different needs. Smart Lunch offered a wide variety of pizzas, pastas and salad at 6,000 won or less while the Smart Dinner set were a combination of pizza, pasta and salad at an attractive price of 22,000 won for two people. Thus, the offerings were designed to meet the identified needs of consumers for those different occasions. The Smart Lunch initiative was met with very positive responses from consumers (Figure 4) with high satisfaction level and high repeat-purchase intent.

The second major value initiative launched was a range of value priced pizza products under the name Fresh Delight, also launched in 2008. The products were offered at a price of 19,000 won versus the premium pizza price range of 25,000 won. For delivery, a pair deal was offered where consumers could buy the second pizza at 10,000 won, which proved to be very popular and generated sales mix of above 30 percent within 2 months after launch.

Fresh Delight was initially received with much enthusiasm due to the low price. The product mix of Fresh Delight two months after launch was above 30 percent due to extremely high trial, which was one of the highest in recent history. However, the sales began to decline after six months, and eventually, the company decided to pull the product from the menu after one year.

Consumer research revealed some dissatisfaction with product taste and low repeat purchase intent. The dissatisfaction arose from “insufficient amount of toppings” and “becomes hard and dry quickly.” The amount of toppings were restricted in order to meet margin requirements at a low selling price while the dryness was a technical issue with the dough. The key learning from the Fresh Delight experience was that consumers would not compromise on product taste just because it’s cheap.

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Figure 3. Value is a category problem

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Figure 4. Satisfaction with Smart

Lunch

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The Special – taste initiative The other action taken was to address the taste issue. One of the key reasons for Pizza Hut’s business decline was that consumers consistently complained about the “saltiness and oiliness” of Pizza Hut products. President S issued a challenge to the R&D team to come up with a great tasting pizza product that could be sold at an attractive price. After much trial and error, the R&D team came up with a line of products using frozen dough that was designed to taste less oily, more chewy, more soft and would hold up well (stay soft, chewy and tasty) under delivery conditions. This was a radical departure from the fresh made pizza approach Pizza Hut normally takes, and required much experimentation before a satisfactory product was developed. The second major challenge with this product was to meet the marketing mandated retail-selling price of under 16,000 for a medium-sized pizza. The target price was arrived at based on pricing research that showed a significant fall-off in purchase intent beyond the 16,000 won price. The third requirement given to R&D was that not only did the product have to taste great at a low price, it also had to have a cost of sales no higher than the average of the rest of the pizzas within Pizza Hut’s portfolio. Yet, it had to taste great, be extremely attractively priced and provide good margin to the company – a tough task indeed!

Such a price point had never been achieved before but the R&D team came through with a creative solution using market learnings from Pizza Hut Japan. The net outcome was the development of a line of five different pizzas called The Special that tasted great, stayed soft and chewy even after 30 minutes (for delivery) and was priced at an attractive price of 15,900 won while maintaining the mandated margin requirements.

Lifetime value and return on marketing investment (ROMI) Theory on ROMI In order to better understand the role of return on marketing investment calculations and how it impacts the decision facing President S, it would be useful to have a brief review of the major theories behind return on marketing (or Marketing Performance Management / MPM) principles. Most senior executives view marketing expenditures as short-term costs, rather than long-term investments, and has regarded marketing expenditures as financially unaccountable (Shultz and Gronstedt, 1997). It was postulated that marketers love to spend money, but hate to assess results of that spending. Marketers have been accused of not being held accountable for showing how marketing expenditures add to shareholder value and the resulting lack of accountability has undermined marketing’s credibility (Rust et al., 2004a).

Rust et al. (2004a) have pointed out that marketers have not been held accountable for clearly demonstrating how marketing expenditures add to shareholder value. This lack of accountability has weakened the credibility of marketing as a function and made it difficult for marketers to justify why their budgets should not get cut whenever the firm has a profit shortage it needs to make up at the end of the year. Rust et al., 2004b has developed a broad framework for assessing marketing productivity using chain-of-effects model that relates specific actions taken by the firm to the overall condition and standing of the firm. In addition, O’Sullivan and Abela (2007) demonstrated that the ability to measure marketing performance has a significant impact on firm performance, profitability and stock returns as well as marketing’s stature within the firm using empirical data from high technology firms in the US.

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In a recent report by the Boston Consulting Group (Harsaae et al., 2010), the report stated that companies invest staggering amounts in marketing with surprisingly little rigor. Because it is so difficult to measure ROMI, executives often rely on rules-of-thumb – such as spending as a percentage of revenues – to guide their decision making.

There have been many studies conducted in the area of marketing performance measurement (MPM). Initial studies focused on different elements of the marketing mix. Gupta (1988) evaluated the effectiveness of sales promotions by decomposing the sales “bump” during the promotion period into sales increase due to brand switching, purchase time acceleration, and stockpiling. Rust (1999) began to look into the role of marketing in more detail in his study, which indicated that the marketing function should play a key role in connecting the customer to the product, service delivery, and financial accountability. Rust showed that the marketing function contributes to perceptions of firm financial performance, customer relationship performance, and new product performance beyond that explained by a firm’s market orientation.

Clark (1999) then summarized the history and interrelationships of marketing performance measures where he pointed out a need for the marketing community to develop a set of fewer and simpler measures to better measure marketing performance and a better understanding of the interrelationships among those measures.

It wasn’t until the early 2000s that ROMI concepts began to appear in research articles. Rust et al. (2004b) presented a framework that enables competing marketing strategy options to be traded off on the basis of projected financial return using data from the airline industry. His strategic framework allowed what-if evaluations of marketing return on investment to enable the firm to focus on marketing initiatives that generates the highest return. Cook and Talluri (2004) developed a framework for optimizing a corporation’s ROMI and highlighted the importance of ROMI to marketing management.

In order to calculate ROMI, one of the most important elements is calculating Customer Lifetime Value (CLV). The key input for determining return is to have an understanding of how much each customer adds to the value of the firm. CLV is typically used in customer relationship management analysis but is also critical in evaluating overall ROMI. Borle et al. (2008) used a hierarchical Bayes approach to estimate the lifetime value of a customer at each purchase occasion for a direct marketing company.

Unfortunately, there has yet to be a final “best practice” theory of how best to measure marketing productivity. Various scholars have set out to define the classification system of measuring marketing expenditures for marketing performance assessment, while others have moved forward and presented a ROMI model using customer equity (Rust et al., 2004b). However, as there isn’t a clear “winner” ROMI model for the retail industry in Korea, President S set out to develop his own simplified ROMI model for Pizza Hut Korea.

Pair deal promotion and ROMI calculation Pizza Hut Korea’s approach to ROMI President S asked the marketing and finance team to work together to come up with a simple Return on Marketing Investment (ROMI) model for all promotions. He first asked finance and marketing to calculate the customer Lifetime Value (CLV) of a Pizza

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Hut customer using historical data extracted from their delivery customer database. Their purchase behavior was analyzed to determine frequency, average sales amount, average margin and average tenure as a customer to determine rough CLV. Light, medium and heavy users were analyzed to determine average CLV for new customers as a group. This CLV data was then applied to a ROMI model in which all the direct promotional costs were calculated while customer acquisition and increase in purchase frequency and amount was estimated.

President S asked the marketing team to calculate the ROMI of the proposed pair deal promotion for The Special as a starting point for making a decision on whether to proceed with the promotion or not. The purpose of the promotion was to drive trial of the new, superior tasting pizza range called The Special with an attractive price point when the customer buys two pizzas. The discount given would be 29.38 percent from list price (normal discount given is 8 percent) for two pizzas. The price of the pair deal was $25 for two pizzas. The number of leaflets and coupons distributed was 25,374,516 and expected redemption rate was 0.135 percent. The total cost of the promotion was $180,043. With this information, the ROMI needed to be calculated.

CLV and ROMI calculation methodology The required information to calculate the CLV is summarized below (see Figure 5).

Database analysis

(1) The first step is to analyze the database to extract the required information to calculate the lifetime value. The customer database is divided into light, medium and heavy users.

(2) The database revealed that for a light user, the average length of time he or she has been a Pizza Hut user is 1.2 years. For medium users it was 2.3 years and for heavy, 3.6 years.

(3) The number of orders during this lifetime was 6, 30 and 69 respectively.

(4) The lifetime revenue for each user type, including new user, was $25, $125, $623 and $1,360 during this period.

Figure 5. Analysis of customer db

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(5) The profit margin for a new customer is 31.5 percent, which is the revenue less the Cost of Goods Sold (COS), Cost of Labor (COL) and marketing expense. For existing users of light, medium and heavy users, the profit margin is the average of total profit margin for the business, which includes allocation of lease costs and overhead, or 6 percent.

(6) The retention rate, from existing data, shows that a 27 percent of new users become light users, 38 percent of light users become medium users and 40 percent of medium users become heavy users.

Lifetime value calculation

(1) For this pair-deal promotion, the first step is to calculate the profit contribution by customer type. For a new user, that would be the average revenue (which is $25 in this promotion) multiplied by the profit margin (31.5 percent). For a light user, that’s $125 times 6 percent or $8. For a medium user, the calculation is $623 times 6 percent or $37 and for a heavy user it’s $82 ($1,360 times 6 percent).

(2) However, we need to get to profit per person. That means we would need to use the retention rate from the table above to calculate the per person profit after retention (27 percent, 38 percent and 40 percent). We thus arrive at a profit per person by customer type of $8 for a new customer, $2 for a light user, $4 for a medium user and $3 for a heavy user. Adding up these numbers gets us to a lifetime value of $17 per customer (see Figure 6).

ROMI formula

(1) The formula Pizza Hut uses was developed internally. It’s essentially profit from the promotion divided by the marketing expenses and the cannibalized losses from giving additional discount.

(2) The assumptions of percent of newcomer versus existing customer that take advantage of the promotion is given along with assumptions about what

Figure 6. Lifetime value calculation

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percent of the promotion participants are cannibalizing existing sales versus truly incremental sales. Also, since there is normally a discount given of 8 percent on average on an on-going basis, only the additional incremental discount is used to calculate the profit loss from giving this additional discount on the pair-deal promotion (see Figure 7).

ROMI calculation

(1) The promotion assumptions are given in the next section.

(2) The effective discount rate is the planned 21.38 percent less the usual discount given of 8 percent for an answer of 13.38 percent.

(3) Number of redeemed coupons (or transactions) is the total number of coupons distributed times the estimated redemption rate of 0.135 percent, or 34,295 coupons.

(4) Number of newcomers is total transactions times the newcomer assumption of 20 percent while number of existing users that take advantage of this promotion is 80 percent of the total transactions.

(5) Number of incremental transactions is number of existing users that participate in the promotion multiplied by the incremental transaction assumption given of 22 percent.

(6) Cannibalized transactions are number of transactions from this promotion less the number of incremental transactions (see Figure 8).

Calculation of profit from existing users and lifetime profit of new users

(1) Incremental sales are the average guest check of $25 multiplied by item 5 above.

(2) Incremental profit is incremental sales multiplied by the profit margin of 31.5 percent.

(3) Cannibalized sales are average guest check multiplied by the number of cannibalized transactions given in item 6 above.

(4) Profit loss from cannibalization is cannibalized sales revenue multiplied by the effective discount rate of 13.38 percent.

Figure 7. Return on marketing investment (ROMI) formula

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(5) To calculate lifetime profit, we know that the lifetime profit of one new customer is $17. We therefore, multiply this by the number of new customers expected from this promotion to get the lifetime profit of new users from this promotion (see Figure 9).

Final ROMI calculation

(1) We also need to find the profit loss from giving this additional discount. The discount per coupon given is the value of promotion item ($25) divided by 100 less the additional discount given multiplied by the additional discount given.

(2) Total additional discount is the amount calculated in (1) above ($3.8) by the number of transactions (34,295) for total additional discount given of $130,107.

(3) Last, we plug in all the numbers in the formula given to arrive at a ROMI of minus 28 percent (see Figure 10).

The limitation of the model is that it clearly does not incorporate brand switching or looks at detailed customer equity indicators but only at actual behaviors of purchase size, frequency and duration. However, for purposes of analysis, President S and his

Figure 8. ROMI calculation – basic

information

Figure 9. ROMI – lifetime profit

calculation

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management team were comfortable using the existing model to estimate ROMI, as their intent was to continue to improve the model based on actual experience.

Pair deal promotion – go or no go? The off-site meeting is scheduled for the following week and President S had to make a decision on whether to proceed with The Special Pair Deal promotion. He wanted to make a decision based on the following set of considerations:

. What is implied by the ROMI of the Pair Deal promotion – President S wanted to make sure everyone had an understanding of whether this promotion would contribute positively to the bottom line via a clear understanding of the ROMI estimation. As you can see, the ROMI calculation prior to running the promotion, based on best estimates and current data, is that it will be minus 28 percent. President S wanted to know what the implications of a minus 28 percent ROMI were as it relates to the decision to run the pair deal promotion or not.

. The second consideration was the trade-off between the possible negative brand image generated through marketing a “cheap product.” Associated with this was the concern about reducing average guest check that might result in lower sales volume.

. Third, President S had to counter-balance the possible negative brand image with the current perception of the brand as being “too expensive” and not providing “value-for-money.” By offering a pair deal on an already attractively priced, good tasting product such as The Special, Pizza Hut could begin to reverse the expensive price perception.

. The fourth consideration had to do with the operational difficulty of dealing with a large jump in order for The Special. Unlike the other pizza products in Pizza Hut’s portfolio, The Special could not be pre-topped (where all the materials for the pizza are prepared in advance, ready for the oven) due to the nature of the dough. This meant that the product could only be prepared once an order was received. This is fine during non-peak hours but during peak hours and, especially if a great value offer is made such as a pair deal promotion, there was

Figure 10. ROMI – profit loss on ROMI

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concern about ability to serve the pizza in a timely manner. This could result in slower service times for both dine in and delivery orders, leading to customer dissatisfaction and loss of business.

. The fifth and last consideration was the objection from some franchisees and store managers about running a price value offer during the traditionally busiest month of the season. August is summer holiday for students as well as for family vacations. This meant that customers were willing to spend more for dining out and, as a result, the month of August had always been a high sales month. Naturally, some store managers and franchisees were concerned about the potentially reduced average guest check that would not be offset by higher volume of transactions. Since there are lots of customers during August anyway, there was some concern as to whether there would be sufficient additional customers to offset the reduced guest check.

President S and his management team had to make a decision on whether to run a Pair Deal promotion on The Special with all of the issues above. Naturally, there was expected to be significant debate but they were fast running out of time for making the decision. President S was determined to make the best decision using ROMI as an initial guiding point but also taking into account all the other strategic considerations mentioned in the case.

Note

1. 1 USD ¼ 1,121 KRW as of November 11, 2011

References

Borle, S., Singh, S.S. and Jain, D.C. (2008), “Customer lifetime value measurement”, Management Science, Vol. 54 No. 1, pp. 100-12.

Clark, B.H. (1999), Vol. 15, pp. 711-32.

Cook, W.A. and Talluri, R.S. (2004), “How the pursuit of ROMI is changing marketing management”, Journal of Advertising Research, September, pp. 244-54.

Gupta, S. (1988), “Impact of sales promotions on when, what, and how much to buy”, Journal of Marketing Research, Vol. XXV, November, pp. 342-55.

Harsaae, J., Link, R., Rich, N., Richardson, K. and Sajdeh, R. (2010), No Shortcuts – The Road Map to Smarter Marketing, BCG Internal Report, Boston, MA.

O’Sullivan, D. and Abela, A.V. (2007), “Marketing performance measurement ability and firm performance”, Journal of Marketing, Vol. 71, April, pp. 79-93.

Pizza Hut Korea (2002-2011), Internal Research Data, Seoul.

Pizza Hut Korea (2011), Interviews with Executives from Marketing, HR, Operations, Finance and CEO of Pizza Hut Korea, May and June 2011.

Rust, R.T. and Moorman, C. (1999), “The role of marketing”, Journal of Marketing, Vol. 63, Special Issue, pp. 180-97.

Rust, R.T., Lemon, K.N. and Zeithaml, V.A. (2004b), “Return on marketing: using customer equity to focus marketing strategy”, Journal of Marketing, Vol. 68, January, pp. 109-27.

Rust, R.T., Ambler, T., Carpenter, G.S. and Kumar, V. (2004a), “Measuring marketing productivity: current knowledge and future directions”, Journal of Marketing, Vol. 68, October, pp. 76-89.

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Schultz, D.E. and Gronstedt, A. (1997), “Making Marcom an investment”, Marketing Management, Vol. 6 No. 3, pp. 40-9.

Further reading

Berger, P.D. and Nasr, N.I. (1998), “Customer lifetime value: marketing, models and applications”, Journal of Interactive Marketing, Vol. 12, Winter, pp. 17-30.

Blanchard, K., Ballard, J. and Finch, F. (2004), Customer Mania! It’s Never Too Late to Build a Customer-Focused Company, Free Press, New York, NY.

Blatterberg, R.C. and Deighton, J. (1996), “Manage marketing by the customer equity test”, Harvard Business Review, July-August, pp. 136-44.

Embrain (2011), Brand Image Tracker 4/2011, Embrain, Seoul.

Jain, D. and Singh, S. (2002), “Customer lifetime value research in marketing: a review and future directions”, Journal of Interactive Marketing, Vol. 16, pp. 34-46.

Kotler, P. and Armstrong, G. (1996), Principles of Marketing, 7th ed., Prentice Hall, Englewood Cliffs, NJ.

Novak, D. and Boswell, J. (2009), The Education of an Accidental CEO, Crown Business, New York, NY.

TNS (2005-2009), Brand Image Tracker 2005-2009, TNS, Seoul.

Appendix. Return on marketing investment using customer lifetime value - Pizza Hut Korea’s case Part I: case overview and teaching background Case synopsis and teaching background. This is a teaching case dealing with Return On Marketing Investment (ROMI) calculation involving a promotional decision Pizza Hut Korea must make in the summer of 2011. The immediate decision that the senior management of Pizza Hut must make is a go/no go decision on an aggressive price promotion for their latest value priced product called The Special. The student needs to understand how Pizza Hut Korea calculates ROMI based on their Customer Lifetime Value (CLV) method and make a recommendation on whether to proceed or not.

To provide background for this decision, the case describes the rise and fall of Pizza Hut Korea. The business had gone through a rapid growth phase from its initial entry into Korea in 1985 to the early 2000s. However, since 2002, the business has undergone a steady decline in sales volume and market share. Many reasons account for the decline including increased competition, market saturation, price resistance and taste issues. President S and his senior management team had tried various strategies to revitalize sales and bring customers back to the stores but with limited success. It was only in early 2011 that the business began to show some traction and a steady increase in transactions. The key reasons for the increase seemed to be the accumulated impact of a steady focus on value driven product innovations and promotional activity. Customers seemed to finally be recognizing that Pizza Hut is no longer the most expensive brand and that there seemed to be a better fit of value for money.

Then in May of 2011, the R&D team, led by marketing, developed a line of superior tasting pizza called The Special that met extremely aggressive price point target, passed the taste hurdle, and managed to deliver similar margins as the rest of the pizza range. This product was launched in May, with much success. The transaction volumes showed double digit increases during the month of May and June. Now, the management team was deliberating what promotional plan to finalize for the peak summer period of August and September. At issue was the question of whether they should run the usual premium pizza promotion to leverage the peak summer season or whether they should aggressively promote the better tasting, value priced line of The Special to get more new users and increase transactions.

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Teaching point. The case is a comprehensive one covering many issues of turnaround management. However, for purposes of focus, a major concentration should be on marketing efficiency measurement, as reflected in Return on Marketing Investment (ROMI) using Customer Lifetime Value (CLV) calculations.

The issue of whether to proceed with the Pair Deal promotion is a complex one, that goes back to the root cause of the decline of Pizza Hut over the last nine years. Students should first analyze the reasons for the decline based on facts presented in the case. Based on this analysis, the students should then calculate the ROMI of the proposed Pair Deal Promotion. The ROMI calculation is only one data point in the decision process. The students will then need to discuss the pros and cons of proceeding with the promotion incorporating ROMI numbers as well as other strategic considerations.

Analysis of the case should focus on the marketing elements of value and taste and the role it’s playing in turning around the business. Students should use information from the case to debate the findings regarding taste and value. The role of the various value priced promotions (Smart Lunch, Smart Dinner, Fresh Delight) should be discussed and how this would impact the brand image.

Then the students should move to the role of The Special and why it’s been met with good initial success. This will lead them to the key question of the importance of measuring marketing efficiency and quantifying the returns. The class should evaluate the way Pizza Hut calculates CLV and subsequent ROMI. It should be noted that there is not yet a perfect answer in terms of how CLV and ROMI should be calculated. The example in the case is only of how Pizza Hut Korea does it. Students should use the model given to calculate the ROMI. This should naturally lead to the merits of Pizza Hut’s ROMI model and whether parts of it should be changed. The professor should let the class discuss the merits of the model and probe the underlying reasons for the student’s rationale for change.

After the ROMI model is calculated, the instructor can then take a vote and ask students to take a position whether to support the Pair Deal promotion or run the usual premium pizza promotion for the peak summer months. The discussion should center around brand image issues, taste perceptions, value perceptions and the importance of increasing transactions versus maximizing sales per transaction.

Assignment questions

1. What are the key factors that led to the turnaround of Pizza Hut Korea’s business in 2011? Was it only value pricing or were there other factors that contributed to this turnaround?

2. Why is Lifetime Value (CLV) important? What are the key factors that need to be

considered in calculating CLV? What is the relationship of CLV to Return on

Marketing Investment (ROMI) and why don’t more companies use ROMI in evaluating

marketing programs?

3. What is the Lifetime Value (CLV) of a new customer, light user, medium user and

heavy user? What are the strengths and weaknesses of the current Lifetime Value

calculation used by Pizza Hut?

4. What is the ROMI of the Pair Deal promotion for The Special using the CLV and ROMI

model presented in the case? What are the strengths and weaknesses of the current

ROMI model?

5. Based on the calculation of ROMI and other strategic considerations, would you

recommend that Pizza Hut go with the Pair Deal promotion or not? Why or why not?

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Part II: teaching plan

Introduction. The instructor may begin the case by asking students to talk about how they choose a particular brand of pizza and why. It should be interesting to have the students poll their friends, family and relatives as to their preferred pizza brand and the reasons for choosing a particular brand. There should be differences in brand preference based on gender, age and income levels. In general, there usually is a preference for Pizza Hut among slightly older, AB socioeconomic consumers (35 þ male and female), while younger females (20-30 year old) would lean toward Mr Pizza. The reasons for preference will center around taste and salad bar preference. There will most likely be comments from young women that Mr Pizza has a better salad bar than Pizza Hut. However, due to the recent improvements in the salad bar as well as in taste of pizzas and pasta, there may be some comments from younger consumers that Pizza Hut’s salad bar and pizza has improved.

If not explicitly stated, the instructor should probe the class on their perception of price value among the major pizza brands. The majority of the class may state that all the major pizza brands are expensive and that they only go there on special occasions. In this situation, the instructor should probe further as to when was the most recent experience the students had and with which brand. It should be interesting to see if the past three years of focus on delivering better value for money that Pizza Hut has implemented has begun to have any impact with the class in terms of value perception.

1. What are the key factors for Pizza Hut’s turnaround in 2011? This opening question will force the students to examine all the facts presented in the case. Students may want to visit several Pizza Hut and Mr Pizza stores for comparison purposes in order to better understand the competitive context. This question will force students to confront the issue of the pros and cons of increasing average guest check versus increasing transactions. While it’s obviously best if both guest check and transactions increases, in saturated markets, it’s virtually impossible to have both. Thus the debate becomes whether it’s more important to maintain margins by increasing average guest check or improve store and staff utilization through transaction increases.

The way to increase guest checks is to either increase prices, offer more bundle or set meal offers or find other ways to motivate customers to purchase more items per transaction. This may be a sound strategy in unsaturated markets, with novel items and with items where consumers see good value for money spent. However, as stated in the case, the pizza market is saturated in Korea. In addition, consumers believe the prices charged by the branded pizza players are expensive. In such a situation, it would be extremely difficult to increase average guest check without seeing a significant drop off in transactions.

Pizza Hut had seen nine years of declining transactions since the early 2000s. This means that, for all expenses other than direct labor, the utilization of assets (lease, fixed labor, overhead, marketing, G&A) has declined proportionally. The implication of this low utilization is that profitability has declined proportionally over that time period. It is for this reason that President S has identified the need to increase transactions as a key requirement to get back to profitability. Even at the expense of reducing average guest check, the ability to attract more customers to order from Pizza Hut is critical to improving store utilization and profitability. This is why President S and his management team have worked hard over the past two and half years to reduce prices and offer more value for money with offers such as Smart Lunch, Fresh Delight, Smart Dinner and now, The Special.

One other key point to note is that price value alone, without an acceptable level of taste quality, will not sustain growth momentum. In other words, people may try a product because of price but, if it does not taste good, they will not come back and

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repeat purchase will be very low. This was demonstrated when Fresh Delight was launched in 2008. Fresh Delight was a value priced pizza range (19,000 Won for medium size versus the usual 25,000 Won) that received tremendous initial response with very high initial trial numbers. However, because the product tended to harden during delivery conditions (when it cools off), the product was not tasty. As a result, repeat purchase incidence was very low and the product was eventually dropped in 2009.

Having a food product that tastes good seems to be an obvious requirement for a food based business. However, in the midst of conflicting priorities and urgency brought on by slowing sales, it’s quite possible that even good managerial teams will miss this basic fact. Because Pizza Hut had an urgent need to launch an attractively priced pizza product, even though the product had mediocre pre-launch test results, the decision was made to launch this Fresh Delight pizza with TV support. Even though money, time and effort was spent on a product that ultimately failed, the management team learned a valuable lesson that consumers will not compromise on the taste of food just because it’s cheap.

This led the team to the launch of The Special. It took a great deal of research with many trial and error, but after nine months, the R&D team was successful in coming up with a product that met all three key requirements of taste, value and margin. This was called The Special and was launched in May of 2011. The product was met with instant success with double digit transaction increases in May and June. The consumers initially tried the product due to the attractive price but came back to order more due to the great taste.

2. Why is Lifetime Value (CLV) important? What are the key factors that need to be considered in calculating CLV? What is the relationship of CLV to Return on Marketing Investment (ROMI) and why don’t more companies use ROMI in evaluating marketing programs?

In order to understand the role of Lifetime Value and why it’s important, we need to think about how a company makes the decision about the best use of its financial resources – money. Without a reasonable understanding of how much one customer contributes to the bottom line of the business, how is a company to decide how much to spend to acquire that customer? For example, if we assume we spend $1 million annually on a promotion to acquire new customers, and we are successful in getting 10,000 new people to become new customers, the average acquisition cost of a new customer is $100. The key question is – “Is spending $100 to acquire one new customer profitable from my company’s perspective?” If we know that one new customer contributes to improve our profits by more than $100, then it’s worthwhile. This is where CLV calculation plays a key role. Once we understand this, then we can apply this concept to evaluate the appropriate amount to spend to retain existing customers, separated further into light, medium and heavy users. Naturally, each customer type will have a different CLV and we can then make decisions about the maximum amount to spend to retain each type of customer.

As we think about how we calculate CLV, we need to start with several key variables. The first is the average spend per customer transaction. Next, we need to understand the frequency of transactions over a fixed time period. We then need to understand the average lifespan of a customer (time period a customer stays a customer). We then multiply all three variables to arrive at a total spend per customer over his or her lifespan as our customer. In addition to these variables, we also need to understand the customer retention rate, profit margin per customer, rate of discount used to determine the present value of future cash flows and the average gross margin per customer lifespan (profit margin per customer multiplied by the average customer

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spend per lifespan). These constants are then used to calculate the Lifetime Value of a customer.

The CLV calculation is one of the most important steps needed to calculate the ROMI of a promotion. As the name implies, Return on Marketing Investment calculates the estimated ROI of a given marketing promotion. For example, if the promotion is a coupon drop to promote a new pizza launch, how can we determine whether the promotion will be margin accretive or dilutive? If the ROMI is positive, then the promotion will be margin accretive. Therefore, to calculate the ROMI, we need to understand our total costs to run the promotion offset against the incremental margin generated. The incremental margin generated is a function of the number of new customers acquired plus impact on average purchase amount and frequency of purchase from the promotion versus when this promotion is not run. CLV is a key calculation required to calculate the actual incremental margin from the new customers.  As you think about how you would actually go about calculating such a ROMI calculation, it becomes clear that it requires internal financial discipline within the company, especially from the marketers. Marketing staff were normally focused on generating ideas and implementing them, not on calculating the financial contribution of their ideas. Too many times, marketing staff feel it’s the finance department’s job to calculate the financial returns. However, it’s up to the marketing staff to take accountability for their marketing spend and to justify the benefits to the company. Because it’s difficult to calculate ROMI and review them on a regular basis, most companies end up spending huge sums on marketing without a clear idea of what the returns are from such spending. It is up to the marketers to be more proactive, and take the time to justify the investment by demonstrating the returns to the company. Once such discipline is established, it’s much easier for the senior leadership in a company to make trade-off decisions on marketing investment based partly on the ROMI calculation.

3. What is the customer Lifetime Value (CLV) of a new customer, light user, medium user and heavy user? What are the strengths and weaknesses of the current CLV calculation used by Pizza Hut? This is the key question raised in the case. In order to get to the answer, the student must first understand how Pizza Hut calculates ROMI. It starts by calculating the customer Lifetime Value (CLV). The key data-points and assumptions used to calculate CLV are presented in the main body of the case. The calculation of the CLV is also presented in the main body of the case.

The key strength of this calculation is that it allows one to have quantified valuation of the lifetime profit contribution from different types of customers. This allows the company to make cost to benefit tradeoffs in terms of amount of marketing dollars to spend to attract and retain different types of customers.

There are several weaknesses to the calculation method above. The biggest weakness is that Pizza Hut does not have exact data on percent of light, medium and heavy users, who were already existing users. They thus use an arbitrary percent from the flow through percent of a new user that becomes a light, medium and heavy user. This is not based on any actual data. However, this can be a starting point and based on actual performance tracking over the next couple of years, one can adjust the percentage.

The other weakness is that only actual data from the past two years are used to make assumptions about the average guest check, flow through percentages and retention rates. It would be more accurate to have a longer track record with but two years is a reasonable starting point.

4. What is the ROMI of the Pair Deal promotion for The Special using the CLV and ROMI model presented in the case? What are the strengths and weaknesses of the current ROMI model? Calculating the ROMI is reasonably simple once the CLV calculation is

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understood. The basic information required to calculate the ROMI is presented in the main body of the case. The answer is also detailed in the main body of the case.

The model is far from perfect but is a starting point for evaluating marketing investment. The key strength of the model is that it allows management to have some idea of the financial contribution of the marketing spend. It provides a baseline-quantified number that helps management make a decision whether to proceed with a particular promotion or not. The variables can easily be modified based on actual learnings, to more accurately reflect reality. The model can be used in order to get approval to proceed with a promotion (pre ROMI) and then a post ROMI evaluation can be done to see if the assumptions made in the pre ROMI were valid. As this is repeated for every promotion and pre/post comparisons are made on ROMI, the firm can more accurately anticipate response rates, leading to higher levels of comfort regarding the accuracy of the pre ROMI calculations.

As stated in the case, this is not a perfect ROMI model. The CLV assumptions are just that, assumptions based on past two years data. Since ROMI is very sensitive to changes in the CLV assumptions, the actual CLV calculations must be checked frequently in order to have continued confidence of the accuracy of the model. In addition, many of the assumptions are based on past two-year history, which may or may not be an accurate reflection of reality. These assumptions need to be checked periodically to ensure reliability.

In addition, as stated in the assumption for calculating lifetime profit from new and existing users, the actual number used to calculate the ROMI only takes 80 percent of the value using an assumption that new customers acquired by giving high level of discount (above 20 percent) is likely to be less loyal. This needs to be verified through actual performance and tracking over time.

5. Based on the calculation of ROMI and other strategic considerations, would you recommend that Pizza Hut go with the Pair Deal promotion or not? Why or why not? The estimated ROMI is -28 percent. This means that for every won spent, we would lose 28 percent on that investment. The natural inclination is to not run such a promotion and stick to running the usual premium pizza promotion during the summer. However, there are some strategic reasons why running this promotion may still make sense.

The first and most important, is that the management believes they have a great tasting product that will not only bring back the users they had lost before but that it may fundamentally change the negative taste perception of the Pizza Hut range of pizzas. The attractive price of offering 2 for 25,000 won may attract new users and former users but the taste should bring these customers back and help to retain them for the longer term. If this is the case, then the lifetime value will be higher along with higher profit from existing users, making this a positive ROMI for the longer term. In particular, the attractive price has a good chance of attracting a much higher newcomer rate than the usual 20 percent in this model. If the newcomer rate significantly exceeds the norm, there is a good chance this could turn out to be a positive ROMI promotion. In addition, if the taste is good, there is a good probability that the coupon redemptions will be much higher than in the predicted model and lead to a much higher profit impact from existing users. Such a scenario would justify going ahead with this promotion even with an initial predicted negative ROMI so that they can fundamentally improve their taste perception as well as encourage high new user trial rate.

The second strategic reason why this promotion may make sense to proceed is to wean the company off the heavy reliance on premium pizzas. As noted in the case, Pizza Hut has a problem with consumers’ perception of value. Consumers believe Pizza Hut pizzas are too expensive. By offering a great tasting pizza at an attractive price, Pizza Hut can begin to change that perception. In particular, by offering such good value while

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competitors are promoting expensive pizzas during the summer peak season, the contrast in value will be made clearer to more consumers.

For the instructor, it is recommended to ask the students to vote by a show of hands which action they would take. After taking the vote, then a discussion should be held with the students taking each position to elaborate on the reasons for their point of view. There is no right or wrong answer but the reasoning should follow the arguments presented above.

Decision taken and actual post ROMI. The management, after a vigorous debate, decided to proceed with the pair deal promotion. It turned out to be the right decision and the sales took off. The first weekend this promotion was run, sales jumped 40 percent versus same time year ago. The second week, sales increased by more than 70 percent versus year ago and the restaurants had a difficult time keeping up with the demand. In all, this promotion led not only to huge sales increases (average of 30 percent increase from August to September) but the momentum was sustained even after the promotion ended. Post buyer response surveys indicated that new users came back to try the product based on the price but that the great taste of the product led to higher repeat purchase and stronger loyalty. As a result, Pizza Hut Korea delivered the best sales performance worldwide compared to all other Pizza Hut countries (see Figure A1).

The post ROMI analysis (exhibit 3) showed a net positive ROMI of 26.5 percent and not the pre-ROMI estimate of -28 percent. This was based on significantly higher coupon redemptions (0.3 percent instead of the predicted 0.1 percent) and a much higher newcomer rate (43 percent versus historical 20 percent) leading to a much higher incremental profit and lifetime value.

The promotion was successful in getting consumers to begin to see Pizza Hut differently in terms of value and taste perception. It led to higher levels of confidence among internal stakeholders (staff and franchisees) of the merits of focusing on improving value and taste perception. It also led to stronger credibility and faith with President S and his management team by the worldwide headquarters and the franchise community, which enabled them to drive other agendas with much less resistance.

III. Conclusion and discussion Turning around a business that has been in decline for a long time requires not just keen consumer insight and excellent marketing tactics, but also necessitates a combination of changing the culture and the mindset of the leaders along with instilling disciplined financial processes. In particular, this paper focuses on the role of quantified marketing performance measurement model that helped to drive a fact based, data driven decision making process that, combined with strategic insight, helped to turn the business around. The customer Lifetime

Figure A1. The special post-promotion sales result

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Value and Return on Marketing Investment model employed by Pizza Hut Korea provides a starting framework for analyzing marketing investment returns that can be adapted by other companies.

The combination of mindset change brought on by disciplined financial discipline and a fact-based approach to decision making seems to have positively impacted the turnaround of Pizza Hut Korea. The business is in its 3rd year of record sales and transaction gains, with a corresponding increase in profits. In addition, the actual post ROMI calculations of the promotions run over the past three years shows a clear improving trend with consistently improving returns.

However, this paper is a paper study based on interviews and data related to one company in one country (Pizza Hut Korea, 2011). Similar studies should be conducted in other industries and countries to validate the commonalities in successful turnaround strategies. The CLV and ROMI model presented is based on only two years of historical data. There have also been some key assumptions made about the loyalty of the customers that needs further validation. The model itself needs further validation by examining the data based on a longer time period, and in various different industries.

The value of this research comes from examining the turnaround strategies employed using key marketing performance metrics. In addition, the study provides value in that it examines the totality of management principles employed (cultural, organizational, financial, marketing) to drive innovation and change. This study will be useful for those that seek to better understand the key principles involved in turning around a business with a particular emphasis on quantified marketing performance measurement.

Corresponding author Sungil Lee can be contacted at: [email protected]

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