Executive Summary
How should brand managers determine the optimal advertising budget to generate sales and maximize profit from multiple regions and over time? How much of it should be set aside for national advertising? How should they allocate the rest across multiple regions? The authors address these questions by developing a method for optimal allocation of advertising resources based on an empirically validated model of how national and regional advertising generate sales over time. They derive the profit-maximizing total budget, its optimal split between national and regional spends, and its optimal allocation across multiple regions. To this end, they formulate a spatiotemporal model that accounts for spatial and serial dependence, spatial heterogeneity, neighborhood effects and sales dynamics. In addition, they develop a new method to estimate the proposed model and apply it to market data from a leading German cosmetics company. Using the estimated parameters, we evaluate the optimal budget and allocations.
Comparing the optimized budget allocations with actual company policy, the proposed approach enhances profit by 5.07%. In comparison, the popular BDI approach yields only a meager profit increase of .37%. By using the proposed method, first, managers can earn a higher profit than with their own actions. Second, they learn about the optimal overall budget, which the BDI approach does not indicate. In the authors’ application, managers should reduce overspending and decrease monthly advertising investment from €7.89 million to €5.96 million. Third, managers can ascertain the optimal split between national and regional spends. Specifically, the actual split was 92.4%, while the optimal split should be 85.9%. Finally, the proposed method identifies over- or underspending in advertising. Specifically, the German cosmetics firm overadvertises in Regions 6 and 7 and at the national level. It underadvertises in Regions 2, 3, 4, and 5. The approach also informs the magnitudes of misallocations: For example, in Region 6, the company overspends by approximately 89.5%, whereas in Region 2 the magnitude of underspending is 62.5%.
If managers were to reallocate budget such that ad spends fall within the respective confidence intervals, the profit increase ranges from 1.7% to 24.1%. Eliminating these misallocations, but keeping the total budget unchanged, brand sales would increase by 1.01% and profit by 3.08%. Therefore, they would be more profitable even when they pursue market share over profits.
The authors gain an important insight that the optimal allocations are not proportional to either the regional sales or per capita regional sales, as the BDI approach suggests. For example, Regions 1 and 2 have higher sales than Regions 3 and 5, and yet the optimal procedure recommends larger increases for Regions 3 and 5. Thus, the new approach offers an invaluable tool for managers to determine the overall budget, its split between national and regional media, and optimally allocations across various regions to maximize profits.
Biography
Ashwin Aravindakshan is an Assistant Professor of Marketing at the University of California Davis. His research interests focus on understanding the role of marketing communications at both the aggregate and individual level. He develops new approaches to determine the effectiveness of marketing instruments and to optimize the budget and the allocation of these marketing instruments over time. His research has been published in Management Science and Marketing Letters, among others. Before joining UC Davis, he studied Aerospace Engineering from IIT–Madras and then completed a PhD in Marketing from the University of Maryland.
Kay Peters is currently Visiting Assistant Professor of Marketing at the University of California Davis and a postdoctoral student at the University of Muenster, Germany. He received his PhD in marketing from the University of Kiel, Germany. In his research, he develops new approaches in marketing communications and customer relationship management. Most of his research is inspired by close cooperation with firms that subsequently implement the solutions to improve their bottom line. To turn scientific marketing research into action, he also engages in executive teaching and takes the new solutions to other firms. His publications have been published in journals such as Journal of Interactive Marketing. He is a recipient of the JIM Best Paper Award and the EMAC&EIASM award for the best doctoral thesis proposal.
Prasad A. Naik is Professor of Marketing at the University of California Davis. He has published more than 40 articles in various journals including Journal of Marketing Research, Journal of Marketing, Marketing Science, Management Science, Journal of the American Statistical Association, Journal of the Royal Statistical Society Series B, Biometrika, Journal of Econometrics, Accounting Review, and Nature Reviews. He serves on the Editorial Boards of Marketing Science, Journal of Marketing Research, International Journal of Research in Marketing, Quantitative Marketing and Economics, Marketing Letters, and Journal of Interactive Marketing. He is a recipient of the Chancellor’s Fellow, AMS Doctoral Dissertation Award, Frank Bass Award, MSI Young Scholar, AMA Consortium Faculty, O’Dell Award Finalist, JIM Best Paper Award, and Professor of the Year. He studied Chemical Engineering (University of Bombay) and has received an MBA from IIM Calcutta and a PhD from the University of Florida. Before his doctoral studies, he worked for several years with Dorr-Oliver and GlaxoSmithKline, where he acquired invaluable experience in business-to-business sales, consumer products sales and distribution, and brand management.
Journal of Marketing Research, Volume 49, Number 1, February 2012
View Table of Contents