Sales Planning and Control Using Absorbing Markov Chains Author(s): William W. Thompson, Jr. and James U.

McNeal Source: Journal of Marketing Research, Vol. 4, No. 1, (Feb., 1967), pp. 62-66 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/3150166 Accessed: 19/06/2008 12:12
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I
W. THOMPSON, Jr., and JAMES U. McNEAL* WILLIAM
A stochastic model that generates data for sales planning and control is described. An example is presented that shows how these data are used to plan short-run sales activities and train effective salesmen. In the model, changes in customer propensities to buy are treated as Markov processes. Finally, it is suggested that the concepts developed here may be computerized and integrated into existing systems for planning and control.

Sales Planning Chains Markov

and

Control

Using

Absorbing

Much attention has been given to the problems of planning and controlling sales efforts [2]. In recent years, rising selling costs have given particular impetus to solving these problems [12]. A major obstacle to developing sales plans and control procedures is the lack of meaningful data on which to base them. It is well known, for example, that selling efforts are most productive when salesmen call on the most promising prospects; but the problem of providing information identifying the most promising buyers has always been difficult for sales managers. This article proposes a model that will give useful data for planning and controlling selling efforts. Further, the article will show how data generated by the model can be used to produce (a) short-run sales strategies and (b) procedures that will help long-run development of salesmen's effectiveness. Although Ehrenberg [5] has recently expressed some reservations, others have found Markov chains to be particularly useful in describing marketing phenomena [1, 3, 4, 6, 9, 11]. Cyert, Davidson, and Thompson, [3], for instance, have used absorbing Markov chains for formulating and evaluating management policies on the aging of charge accounts in a department store. The model here applies Markov chains to determining economic decision rules for planning and controlling sales efforts. Shuchman [10] has used a similar analysis; however, his assumptions and results differ markedly from those presented here.
* William W. Thompson, Jr., is professor of quantitative sciences, University of Houston, and James U. McNeal is associate professor of marketing, University of Georgia. The authors are grateful to the Research Foundation, Oklahoma State University, for supportingthis work.
62

THE MODEL The fundamental assumptions underlying the model are: which is constantfor all customers. 2. Sales are made on an ad hoc basis. There is no continuingcustomer-salesman relationship. 3. The expected cost of calling on a customer is equal for all customers. 4. The expected time consumed in a sales call is equal for all customers. 5. Customers may be classified on the basis of their relative propensities to buy as exhibited during the most recent previouscall. The first four assumptions fit a number of selling situations. An encyclopedia salesman, for example, usually offers one product at one price. A customer rarely purchases more than once. Therefore, after a sale is made, the salesman is not likely to call again. The cost of a call should not vary significantly among customers. This is particularly true when the sales presentation is totally programmed or canned. Assumption 5 simply recognizes that propensity to buy is a most logical base for classifying potential customers. Obviously, this assumption would not be sound 1. The salesman sells only one product, the price of

for many convenience goods that are purchased through habit or impulse. The system described here may be treated as a finite absorbing Markov process.1 It includes two absorbing
1A Markov process is one in which only the immediate past is relevant for predicting the future. More specifically, the probability of entering a certain state depends only on the state

Journal of Marketing Research,

Vol. IV (February1967), 62-6

PLANNING AND CONTROL USINGABSORBING SALES MARKOV CHAINS

63

states-sale completed and sale lost-and n-2 nonabsorbingor transientstates. In general, any appropriate states may be used. These are numberof nonabsorbing ordered so as to establish a range of discrete classes, based on perceiveddifferences in customerpropensities to buy.2It is also usuallyconvenientto defineone nonabsorbing state for the initial classification of new customers.The set of n statesis exhaustiveandmutually exclusive.3Thus, a customerassignedto one of the n statesbeforea call mustbe assignedto one of them after the call. The transitionof customersfrom one state Si to another Sj occurs accordingto the transitionprobability for the system Pij . The set of all transition probabilities of n statesis given as the transitionmatrix:
pll
p21

favorable-verbal, unfavorable-verbal, favorable-nonverbal, or unfavorable-nonverbal. (An example of a favorable-verbal cue is a complimentabout the salesman's product or company. If, on the other hand, a customerfrequently looks away from the salesman,this action is interpreted as unfavorable-nonverbal.) An for a particularcall may analysisof these observations be summarized into a compositeinterestscore that may be relateddirectlyto one of the Markovian states.4
State Type Description

P12
P22

P'
' *

plj
p2j

.'
*' P*

Pln
2n

(1)

P=

Pil
_Pnl

Pi2
Pn2

P'

pij
pinj

* ?
*

Pin
pnn_

S1 Absorbing Sale completed during most recent call Sale lost during most recent call Si Absorbing S3 Nonabsorbing New customer-no history S4 Nonabsorbing Customer indicated low degree of interest during most recent call Ss Nonabsorbing Customer indicated medium degree of interest during most recent call S6 Nonabsorbing Customer indicated high degree of interest during most recent call

where for any point in time, the probabilityP,j is definedfor each possibletransition. Symbolically,

Assume that for a given salesman, and for a given point in time, probabilityvalues are determinedfor Equation1 as follows: 1 00 0 0 10 0 .10 .30 0 .25 0 .05 .45 0 .20 .15 .10 0 .15 .20 .05 0 .15
0 0 .20 .25 0 0 .15 .35

(2)

ipij= j=1

(for i = 1,2,

. , n).

(la)

P=

.20 .10 .30 .30

Considera case wheren = 6. In such a system,there states. Defiare two absorbingand four nonabsorbing nitions of these states are providedin the figure. The of states term"interest," whichis used in the descriptions in the figure, denotes propensityto buy as perceived by the salesman. Admittedly, a salesman's evaluation of propensityto buy is somewhatsubjective.However, in manyinstances,wayscan be developedto maintain adequateobjectivity.Thompson[13], for example, has describeda brief and practicalworksheetby which a salesmanmay cross-classifycustomercues as either
presently occupied. A Markov chain is a stochastic process involving a succession of simple Markov processes. A finite Markov chain is an absorbing chain if it contains at least one absorbing state, and if it is possible to reach an absorbing state from every state in the chain in a finite number of steps. An absorbing state is one that once entered can never be left; see [8]. 2A fundamental differencebetween this approach and that of Shuchman [10] is in the basis of classification. Shuchman, like Cyert, Davidson and Thompson [3], defines his set of states in terms of an aging process. In his formulation, a given customer progresses automatically from one state to another according to the number of sales calls made upon him. Shuchman implicitly assumes that customers of a given age (state) are homogeneous for propensities to buy. This assumption would appear to be unrealistic in that it avoids the basic problem of evaluating the complex differences which exist between customers. In effect, Shuchman uses the behavior patterns of salesmen as a measure of customer behavior. 3The set is exhaustive in that it includes all possible states. It is mutually exclusive because a customer can be classified in one and only one state at any given point in time.

In general, (3)
Pij = m
Uij
:

E k=l

Uik

whereuij is the numberof times a transition from Si to Sj is expectedto occurin m trials. As a practicalmatter,transitionprobabilities are determinedfrom history.It shouldbe noted that a particular salesman'stransitionmatrix may vary with time. Indeed, it would be expected that the probabilitiesof success (transitionto state S1) will increase and the
probabilities of failure (transition to state S2) will de-

creaseas the salesman's abilitiesare developedby learn-

4There may be some question about whether a salesman would give an honest estimate of a customer's propensity to buy because such an appraisal ultimately influences management's evaluation of him. The system is designed, however, to encourage an accurate appraisal. If, for example, a salesman typically overestimates propensity to buy, this eventually will be reflected in a low sales rate of very likely prospects. If he typically underestimatespropensity to buy, a low effectiveness score for prospects shifting to high propensity states will result. Further, since the system directs the salesman to make future calls on prospects having high expected values, consistently placing good prospects in a low propensity state denies the salesman opportunities to call on his most valuable customers.

64 ing. A transition matrix, such as la, describes the salesman's ability to perform at a point in time. It is this matrix, then, that should be used as a basis for planning and control during the time period under consideration. The transition matrix may be kept up to date by including the more recent experience and excluding the more noncurrent experience in calculating transition probabilities. It is convenient to transform the matrix of la into canonical form. In general, for a system of r absorbing states and s transient states, this form is r (4)
p =

FEBRUARY 1967 JOURNAL OF MARKETING RESEARCH, now classified in state S4, for instance, he will be in state S5 an average of .590 times before ultimately being absorbed. It is expected that a customer presently classified in S6 will be in that state 1.976 times before absorption. The expected total number of calls that must be completed before a customer's absorption is, (7)
r = Ne,

where ~ is a column vector with all unity elements.7 For the example, (7a) r = 1 .555 0 1.455 .547 0 .547 0 .547 .667 .590 1.890 .939 .626 .504 1.024 1.976 1 1 1 1 2.848 2.549 3.461 . 3.462

s
}S

Irxr Orxs }r
-Rsxr | Qsxs_

where I is an identity matrix and 0 is a zero matrix. For the example under consideration,
Si S2 S3 S4 S5 S6

S3 will require an additional 2.848 calls before a sale is

Thus, (7a) shows that a customer who is classified in

(4a)

1 0 S2 P = S3 .10 S4 .05 S5 .15 S6 .20

Si

0 1 .30 .45 .10 .05

0 O 0 O 0 0 0 0

0 0 .25 .20 .15 .15

0 0 .20 .20 .25 .30

0 0 .15 .IU .35 .30

.t^s

Kemeny and Snell [8] have suggested some interesting results that may be obtained from (4a).5 These will now be examined in light of the present example. The fundamental matrix for an absorbing Markov chain is defined as N = (I - Q)-1. (5) From 4a, 1 -.25 .80 0 0 -.15 0 -.15 -.20 -.20 .75 -.30 -.15 -.10 -.35 ' .70 .667 .590 1.890 .939 .626 .504 1.024 1.976

(6)

I-

Q=

made or lost. Similarly, a customer in state S6 requires an expected 3.462 calls before the customer-salesman relationship is ended. Thus far, the model has not discriminated between the two absorbing states. Obviously, such a distinction is important. The matrix, B = NR, (8) gives probabilities bi that a process presently in the nonabsorbing state Si will be absorbed in the absorbing state Sj. From (5a) and (4a), 1 .555 .667 .626 .10 .30 0 1.455 .590 .504 .05 .45 0 .547 1.890 1.024 .15 .10 0 .547 .939 1.976 .20 .05 (8a) .352 .648 .261 .739 .515 .485 .562 .438
%,--

Notice that in (8a),

r

and 1 .555 0 1.455 (5a) N = (I - Q)- = 0 .547 .547 -0 (9)

j=1

bij

= 1, for all i.

The elements nij of matrix N may be interpreted as the mean number of times a customer will be in a transient state Sj before being absorbed.6 If a customer is
5 The model presented in this paper uses the general framework developed by Kemeny and Snell; see, especially, Chapter III. 'Estimated variances for the elements nlj are given by the s x s matrix,

The matrix B shows that the probability of ultimately selling to a customer now classified in S4 is .261. The probability that the sale will be lost is .739. Similar interpretations may be made for the other transient states. USE OF THE MODEL FOR SHORT-RUN PLANNING The model developed in the last section has as a primary function the generation of data to aid in short7 The vector r gives the number of times, including the original position, the process is in a nonabsorbing state. This is equivalent to the number of calls required to complete absorption, including the final call that results in absorption. The variance of r is given by
72 =

where Nd, is the matrix N with all off-diagonal entries set to zero, and N,q is a matrix of the squared entries of N. Variances are not calculated for the example; see [8].

N2= N(2Nd,- 1) - N,q,

(2N -

) T - Tq .

PLANNING AND CONTROL USINGABSORBING MARKOV SALES CHAINS

65

In this section,a method runplanningof sales activities.8 a formal procedure that uses these data in determining for schedulingthe time of sales personnelis given. In effect, a decision rule is formulatedby which the customers of a given salesmanmay be rank orderedrelative to their net expectedvalues. By applyingthis rule, the salesman'scalls may be scheduledto maximizethe total expected net revenues within the constraintimposed by limited sale's time.9 If the cost of makinga call is assumedconstantfor all calls, the expectedtotal costs of movingcustomersfrom each of the non-absorbingstates to absorbing states are givenby the vector,
(10)
C = CT,

The value 97.85, for instance, representsthe gross with customers of stateSs . expectedrevenueassociated Expectedvalues of customersby states are given by the vector (13) For the example, 66.88
49.59 _

V = R -C.

42.72
38.24

97.85 106.78
(13a)

51.92 51.93

where c is a constant and r is the vector of (7a). Assume

thatthe cost of a call is $15. Then, 2.848 (lOa)

2.549
C=

24.17 11.35 45.93

54.85

42.72
38.24

(1)

3.461 3.462

51.92 51.93

This vectormay be interpreted as follows:A customer now classifiedin S4 has an expectedvalue, in net dollar return,of only $11.35. Similarly,a customerin S6 is worth $54.85. From (13a) it is evidentthat the priority
ordering S6,
S5, S3, S4

It is expected,for instance,that $38.24 will be needed to absorba customer who is classified in stateS4 . The expected revenue associatedwith a given customer is the revenuethat would be realizedif a sale is made, times the probabilitythat the sale will be made. Expected revenues for customersin each of the nonstatesare givenby absorbing R = BU, (11) whereB is the matrixof (8), and U is a columnvector to the two abhaving revenue elements corresponding sorbingstates. If, for example, a sale provides a constant $190 in revenues,and a lost saleyieldsno revenue,then (12) and
.352 .648 .261 .739 .515 .485 .562 .438

allocatingthe salesman'stime. In effect, the salesman

should give top priority to customers in state S6 .10 Any

provides an economic rule for

time should be allocatedto customersin S5, remaining etc. It is interestingto note, in the example, that new customers(state S3) are of more value than those in automatically eliminatingpoor prospectsand replacing themwithnew prospects. USE OF THE MODEL FOR LONG-RUN CONTROL In the last section,the salesman's mannerof operating (as reflected by his transition matrix) was taken as given.It may be reasoned,then, that a specificeconomic rule for rank orderingcustomers,such as the one establishedin the previousanalysis,representsan optimal short-runstrategyonly as long as the transitionmatrix to it remainsunchanged. corresponding This section offers some observations on how a particular salesman'stransitionmatrix may be used as a device for helping develop his effectiveness.A critical analysisof the transitionmatrix P, along with its corB and r matrixes,shouldrevealthe areasin responding which a salesman indicates weaknesses. By focusing attentionon these areas, the salesmanmay be able to eliminatehis difficulties(and thus upgradehis transition matrix).For example,the matrixB of (8a) shows that the probability of makinga sale to a customerin S6
10A timing constraint may be superimposed on this framework. For example, it may be desirable to specify a minimum time interval between calls for customers of a given class. This would have the effect of placing those customers most recently contacted in an ineligible status.

state S4. Thus, the structure provides a formal rule for

U=

190]

190 0'

(11)

66.88 49.59 97.85 106.78

It should be observed that the Shuchman model [10] also incorporates a planning feature for sales management. As he notes, however, his formulation is based on assumptions that are quite restrictive. In view of these limitations, that model would not seem to be appropriate for planning at an operational level. 9 See [7] for a discussion of Markov processes with rewards.

66 is only .562. Perhaps a modified sales presentation at this advanced stage would increase the effectiveness of the salesman's total performance. To institute control over the process of development, it is desirable to establish some benchmarks. These may consist of a standard transition matrix and appropriate standard matrices that are devised from it, i.e., B, r, N, etc. One logical possibility is to establish a control transition matrix P having mean entries Pij based on the transition experiences of all salesmen. Corresponding N, r, and B matrixes also can be formulated. The actual performance of each salesman may then be related to average or standard performance. It is possible that the properties of the variables being controlled are such that even highly formalized control systems based on statistical inference may be used. SOME CONSIDERATION FOR IMPLEMENTATION It will be observed that the type of analyses presented in this article may be easily adapted to computer operations. In fact, the program described may be integrated with little difficulty into an existing computerized framework for planning and controlling sales activities. Initially, a transition matrix for each salesman is stored in memory. Inputs to the system consist of weekly or daily sales data, including those pertaining to classification and reclassification of customers. Each salesman's transition matrix is updated continually by including the most recent input data in the calculation of new moving average probability values. As output, the salesman periodically gets a list of all current customers, including new prospects. These are rank ordered relative to expected values. Finally, a performance eval-

1967 FEBRUARY OF MARKETING JOURNAL RESEARCH, uation based on the standard transition matrix may be included in the printout. REFERENCES
1. Wroe Alderson and Paul E. Green, Planning and Problem Solving in Marketing, Homewood, Ill.: Richard D. Irwin, Inc., 1964, 180-91. 2. Richard D. Crisp, Sales Planning and Control, New York: McGraw-HillBook Co., 1961. 3. R. M. Cyert, et al., "Estimationof the Allowance for Doubtful Accounts by Markov Chains," Management Science, 8 (April 1962), 287-303. 4. J. E. Draper and L. H. Nolin, "A Markov Chain Analysis of Brand Preference," Journal of Advertising Research, 4 (September1964), 33-9. 5. A. S. C. Ehrenberg, "An Appraisal of Markov BrandSwitching Models," Journal of Marketing Research, 2 (November 1965), 347-62. 6. J. D. Herniter and J. F. Magee, "Customer Behavior as a Markov Process," Operations Research, 9 (January 1961), 105-22. 7. Ronald A. Howard, Dynamic Programming and Markov Processes, New York: John Wiley & Sons, Inc., and Cambridge: The Technology Press of The Massachusetts Institute of Technology, 1960. 8. John G. Kemeny and J. Laurie Snell, Finite Markov Chains, New York: D. Van Nostrand, Inc., 1960. 9. Richard B. Maffei, "BrandPreferences and Simple Markov Processes," OperationsResearch, 8 (March 1960), 210-8. 10. Abraham Shuchman, "The Planning and Control of Personal Selling Effort Directed at New Account Acquisition: A Markovian Analysis," in New Research in Marketing, Berkeley, Calif.: The Institute of Business and Economic Research, 1966, 45-56. 11. George P. H. Styan and Harry Smith, Jr., "MarkovChains Applied to Marketing," Journal of Marketing Research, 1 (February 1964), 50-5. 12. "The Climbing Cost of IndustrialCalls," Sales Management, 92 (April 17, 1964), 87. 13. Joseph W. Thompson, Selling: A Behavioral Science Approach, New York: McGraw-HillBook Co., 1966.