Long-Term Impact of Marketing

The following sections are included:

• Dedication
• About the Author
• Contents
• Introduction

The author’s principal objective is to present a framework for market analysis which specifically models primary demand, competitive reaction, and feedback effects of the market variables. The approach is an extension of earlier work by Clarke and by Lambin, Naert, and Bultez on the relationship among the elasticities of the marketing variables. The author develops this framework and formulates an approach for empirical applications based on principles of time-series analysis. In particular, Granger’s well-known causality definition is used in conjunction with Box–Jenkins) analysis to find the nonzero elements in the marketing model. These principles are applied empirically to the case of a city pair of the U.S. domestic air travel market, where three major airlines compete on the basis of flight scheduling and advertising. The analysis reveals that flight scheduling has a market-expensive or a competitive effect, depending on the competitor, and that advertising does not have a significant impact on performance. In addition, several patterns of competitive reactions are found. The author offers observations on the theoretical and empirical aspects of this approach to marketing model building…

The effects of the marketing actions of one brand can be distributed among its competitors’ market shares in a complex manner. This chapter presents and illustrates methods for modeling brand competition and brand strategies in markets where competitive effects can be differentially and asymmetrically distributed. We discuss the empirical specification, parameter estimation and competitive-strategy implications of the models proposed. Price and advertising competition among eleven brands of an Australian household product is used to illustrate the application of these procedures.

The effects of treatment and legal supervision on narcotics use and criminal activities were assessed by applying newly developed time-series methods that disentangle the long-term (permanent) and the short-term (temporary) effects of intervention. A multivariate systems approach was used to characterize the dynamic interplay of several related behaviors at a group level over a long period of time. Five variables — abstinence from narcotics use, daily narcotics use (or addiction), property crime, methadone maintenance treatment, and legal supervision — were derived by aggregating information from over 600 narcotic addiction histories averaging 12 years in length. Because of the long assessment period, age was also included as a control variable.

Overall, the system dynamics among the variables were characterized by long-term rather than short-term relationships. Neither methadone maintenance nor legal supervision had short-term effects on narcotics use or property crime. Methadone maintenance treatment demonstrated long-term benefits by reducing narcotics use and criminal activities. Legal supervision, on the other hand, did not reduce either narcotics use or property crime in the long run. Instead, there was a positive long-term relationship in which a higher level of legal supervision was related to higher levels of narcotics use and criminal activity. This latter finding is consistent with the observation that either narcotics use or criminal activity is likely to bring addicts to the attention of the legal system. However, these addicts, as a group, did not directly respond to legal supervision by changing their narcotics use or crime involvement except perhaps through coerced treatment. This chapter explores the policy implications of these findings.

Are marketing efforts able to affect long-term trends in sales or other performance measures? Answering this question is essential for the creation of marketing strategies that deliver a sustainable competitive advantage. This chapter introduces persistence modeling to derive long-term marketing effectiveness from time-series observations on sales and marketing expenditures. First, we use unit-root tests to determine whether sales are stable or evolving (trending) over time. If they are evolving, we examine how strong this evolution is (univariate persistence) and to what extent it can be related to marketing activity (multivariate persistence). An empirical example on sales and media spending for a chain of home-improvement stores reveals that some, but not all, advertising has strong trendsetting effects on sales. We argue that traditional modeling approaches would not pick up these effects and, therefore, seriously underestimate the long-term effectiveness of advertising. The paper concludes with an agenda for future empirical research on long-run marketing effectiveness.

An intuitively appealing decision rule is to allocate a company’s scarce marketing resources to where they have the greatest long-term benefit. This principle, however, is easier to accept than it is to execute, because long-run effects of marketing spending are difficult to estimate. The authors address this problem by examining the behavior of market response and marketing spending over time and identify four common strategic scenarios: business as usual, hysteresis in response, escalation, and evolving business practice. The authors explain and illustrate why each scenario can occur in practice and describe its positive and negative consequences for long-term profitability. The authors propose to use mul-tivariate persistence measures to identify which of the four strategic scenarios is taking place and illustrate this approach in the pharmaceutical and packaged-food industries. The results substantiate the authors’ proposition that the strategic scenario is a major determinant of marketing effectiveness and long-term profitability. This conclusion sets up a substantial agenda for further research.

Although price promotions have increased in both commercial use and quantity of academic research over the last decade, most of the attention has been focused on their effects on brand choice and brand sales. By contrast, little is known about the conditions under which price promotions expand short-run and long-run category demand, even though the benefits of category expansion can be substantial to manufacturers and retailers alike

This chapter studies the category-demand effects of consumer price promotions across 560 consumer product categories over a 4-year period. The data describe national sales in Dutch supermarkets and cover virtually the entire marketing mix, i.e., prices, promotions, advertising, distribution, and new-product activity. We focus on the estimation of main effects (i.e., the dynamic category expansive impact of price promotions) as well as the moderating effects of marketing intensity and competition (both conduct and structure) on short-and long-run promotional effectiveness.

The research design uses modern multivariate time-series analysis to disentangle short-run and long-run effects. First, we conduct a series of unit-root tests to determine whether or not category demand is stationary or evolving over time. The results are incorporated in the specification of vector-autoregressive models with exogenous variables (VARX models). The impulse-response functions derived from these VARX models provide estimates of the short- and long-term effects of price promotions on category demand. These estimates, in turn, are used as dependent variables in a series of second-stage regressions that assess the explanatory power of marketing intensity and competition. Several model validation tests support the robustness of the empirical findings.

We present our results in the form of empirical generalizations on the main effects of price promotions on category demand in the short and the long run and through statistical tests on how these effects change with marketing intensity and competition. The findings generate an overall picture of the power and limitations of consumer price promotions in expanding category demand, as follows.

Category demand is found to be predominantly stationary, either around a fixed mean or a deterministic trend. Although the total net short-term effects of price promotions are generally strong, with an average elasticity of 2.21 and a more conservative median elasticity of 1.75, they rarely exhibit persistent effects. Instead, the effects dissipate over a time period lasting approximately 10 weeks on average, and their long-term impact is essentially zero. By contrast, the successful introduction of new products into a category is more frequently associated with a permanent category-demand increase.

Several moderating effects on price-promotion effectiveness exist. More frequent promotions increase their effectiveness, but only in the short run. The use of nonprice advertising reduces the category-demand effects of price promotions, both in the short run and in the long run. Competitive structure matters as well: The less oligopolistic the category, the smaller the short-run effectiveness of price promotions. At the same time, we find that the dominant form of competitive reaction, either in price promotion or in advertising, is no reaction. Short-run category-demand effectiveness of price promotions is lower in categories experiencing major new-product introductions. Finally, both the short- and long-run price promotion effectiveness is higher in perishable product categories.

The paper discusses several managerial implications of these empirical findings and suggests various avenues for future research. Overall, we conclude that the power of price promotions lies primarily in the preservation of the status quo in the category.

To what extent do price promotions have a long-term effect on the components of brand sales, namely, category incidence, brand choice, and purchase quantity? The authors answer this question by using persistence modeling on weekly sales data of a perishable and a storable product derived from a scanner panel. Their analysis reveals, first, that permanent promotion effects are virtually absent for each sales component. Next, the authors develop and apply an impulse response approach to estimate the promotional adjustment period and the total dynamic effects of a price promotion. Specifically, they calculate the long-term equivalent of Gupta’s (1988) 14/84/2 breakdown of promotional effects. Because of positive adjustment effects for incidence but negative adjustment effects for choice, the authors find a reversal of the importance of category incidence and brand choice: 66/11/23 for the storable product and 58/39/3 for the perishable product. The authors discuss the implications of the findings and suggest some areas for further research.

Year after year, managers strive to improve financial performance and firm value through marketing actions such as new product introductions and promotional incentives. This study investigates the short- and long-term impact of such marketing actions on financial metrics, including top-line, bottom-line, and stock market performance. The authors apply multivariate time-series models to the automobile industry, in which both new product introductions and promotional incentives are considered important performance drivers. Notably, whereas both marketing actions increase top-line firm performance, their long-term effects strongly differ for the bottom line. First, new product introductions increase long-term financial performance and firm value, but promotions do not. Second, investor reaction to new product introduction grows over time, indicating that useful information unfolds in the first two months after product launch. Third, product entry in a new market yields the highest top-line, bottom-line, and stock market benefits. Managers may use these results to justify new product efforts and to weigh short- and long-term consequences of promotional incentives.

How do competitors react to each other’s price-promotion and advertising attacks? What are the reasons for the observed reaction behavior? We answer these questions by performing a large-scale empirical study on the short-run and long-run reactions to promotion and advertising shocks in over 400 consumer product categories over a four-year time span.

Our results clearly show that the most predominant form of competitive response is passive in nature. When a reaction does occur, it is usually retaliatory in the same instrument, i.e., promotion attacks are countered with promotions, and advertising attacks are countered with advertising. There are very few long-run consequences of any type of reaction behavior. By linking reaction behavior to both cross- and own-effectiveness, we further demonstrate that passive behavior is often a sound strategy, while firms that do opt to retaliate often use ineffective instruments, resulting in “spoiled arms.” Accommodating behavior is observed in only a minority of cases, and often results in a missed sales opportunity when promotional support is reduced. The ultimate impact of most promotion and advertising campaigns depends primarily on the nature of consumer response, not the vigilance of competitors.

Even in mature markets, managers are expected to improve their brands’ performance year after year. When successful, they can expect to continue executing on an established marketing strategy. However, when the results are disappointing, a change or turnaround strategy may be called for to help performance get back on track. In such cases, performance diagnostics are needed to identify turnarounds and to quantify the role of marketing policy shifts in this process. This chapter proposes a framework for such a diagnosis and applies several methods to provide converging evidence for two main findings. First, contrary to prevailing beliefs, the performance of brands in mature markets is not always stable. Instead, brands systematically improve or deteriorate their performance outlook in clearly identifiable time windows that are relatively short compared to windows of stability. Second, these shifts in performance regimes are associated with the brand’s marketing actions and policy shifts, as opposed to competitive marketing. Promotion-oriented marketing policy shifts are particularly potent in improving a brand’s performance outlook.

Companies can acquire customers through costly but fast-acting marketing investments or through slower but cheaper word-of-mouth processes. Their long-term success depends critically on the contribution of each acquired customer to overall customer equity. The authors propose and test an empirical model that captures these long-term effects. An application to a Web hosting company reveals that marketing-induced customers add more short-term value, but word-of-mouth customers add nearly twice as much long-term value to the firm. The authors illustrate their findings with some dynamic simulations of the long-term impact of different resource allocations for acquisition marketing.

The marketing profession is being challenged to assess and communicate the value created by its actions on shareholder value. These demands create a need to translate marketing resource allocations and their performance consequences into financial and firm value effects. The objective of this article is to integrate the existing knowledge on the impact of marketing on firm value. The authors first frame the important research questions on marketing and firm value and review the important investor response metrics and relevant analytical models as they relate to marketing. Next, they summarize the empirical findings to date on how marketing creates shareholder value, including the impact of brand equity, customer equity, customer satisfaction, research and development and product quality, and specific marketing-mix actions. Then, the authors review emerging findings on biases in investor response to marketing actions. They conclude by formulating an agenda for future research challenges in this emerging area.

Marketing decision makers are increasingly aware of the importance of shareholder value maximization, which calls for an evaluation of the long-term effects of their actions on product-market response and investor response. However, the marketing literature to date has focused on the sales or profit response of marketing actions, and the goals of marketing have traditionally been formulated from a customer perspective. Recently, there have been a few studies of the long-term investor response to marketing actions. The current research investigates one important aspect of this impact, the long-term relationship between advertising spending and market capitalization. The authors hypothesize that advertising can have a direct effect on valuation (i.e., an effect beyond its indirect effect through sales revenue and profit response). The empirical results across two industries provide support for the hypothesis that advertising spending has a positive, long-term impact on own firms’ market capitalization and may have a negative impact on the valuation of a competitor of comparable size. The authors quantify the magnitude of this investor response effect for and discuss its implications for further research.

Marketing managers often use consumer attitude metrics such as awareness, consideration, and preference as performance indicators because they represent their brand’s health and are readily connected to marketing activity. However, this does not mean that financially focused executives know how such metrics translate into sales performance, which would allow them to make beneficial marketing mix decisions. We propose four criteria — potential, responsiveness, stickiness, and sales conversion — that determine the connection between marketing actions, attitudinal metrics, and sales outcomes.

We test our approach with a rich dataset of four-weekly marketing actions, attitude metrics, and sales for several consumer brands in four categories over a seven-year period. The results quantify how marketing actions affect sales performance through their differential impact on attitudinal metrics, as captured by our proposed criteria. We find that marketing—attitude and attitude—sales relationships are predominantly stable over time but differ substantially across brands and product categories. We also establish that combining marketing and attitudinal metrics criteria improves the prediction of brand sales performance, often substantially so. Based on these insights, we provide specific recommendations on improving the marketing mix for different brands, and we validate them in a holdout sample. For managers and researchers alike, our criteria offer a verifiable explanation for differences in marketing elasticities and an actionable connection between marketing and financial performance metrics.

Marketing executives are under pressure to produce revenue and profit growth for their brands. In most cases that involve requesting gradually higher marketing budgets, which is expensive, especially considering the known diminishing return effects of marketing. However, in reality, brand sales tend to evolve not gradually, but rather in spurts, i.e. short periods of sales evolution alternating with longer periods of stability. We use the Wang-Zhang (2008) time-series test to identify such growth spurt periods, which represent opportunity windows for the benefitting brand. We then relate these windows to exogenous events such as positive product reviews, which create a temporarily more benevolent environment for the brand. We suggest brand managers be vigilant to catch and take advantage of such opportunity windows to generate sustained growth at low cost, and derive the implications of such vigilant spending for marketing budget setting. Our empirical illustration is based on several brands in the digital single-lens reflex (DSLR) camera market. It demonstrates, among other things, that competitors in this market typically do not take advantage of windows of growth opportunity offered by positive product reviews.