Knowledge that Transforms

Companies spend millions of dollars on advertising to boost a brand's image and simultaneously spend millions of dollars on promotion that many believe calls attention to price and erodes brand equity. We believe this paradoxical situation exists because both advertising and promotion are necessary to compete effectively in dynamic markets. Consequently, brand managers need to account for interactions between marketing activities and interactions among competing brands. By recognizing interaction effects between activities, managers can consider interactivity trade-offs in planning the marketing-mix strategies. On the other hand, by recognizing interactions with competitors, managers can incorporate strategic foresight in their planning, which requires them to look forward and reason backward in making optimal decisions. Looking forward means that each brand manager anticipates how other competing brands are likely to make future decisions, and then by reasoning backward deduces one's own optimal decisions in response to the best decisions to be made by all other brands. The joint consideration of interaction effects and strategic foresight in planning marketing-mix strategies is a challenging and unsolved marketing problem, which motivates this paper. This paper investigates the problem of planning marketing mix in dynamic competitive markets. We extend the Lanchester model by incorporating interaction effects, constructing the marketing-mix algorithm that yields marketing-mix plans with strategic foresight, and developing the continuous-discrete estimation method to calibrate dynamic models of oligopoly using market data. Both the marketing-mix algorithm and the estimation method are general, so they can be applied to any other alternative model specifications for dynamic oligopoly markets. Thus, this dual methodology augments the decision-making toolkit of managers, empowering them to tackle realistic marketing problems in dynamic oligopoly markets. We illustrate the application of this dual methodology by studying the dynamic Lanchester competition across five brands in the detergents market, where each brand uses advertising and promotion to influence its own market share and the shares of competing brands. Empirically, we find that advertising and promotion not only affect the brand shares (own and competitors') but also exert interaction effects, i.e., each activity amplifies or attenuates the effectiveness of the other activity. Normatively, we find that large brands underadvertise and overspend on promotion, while small brands underadvertise and underpromote. Finally, comparative statics reveal managerial insights into how a specific brand should respond optimally to the changes in a competing brand's situation; more generally, we find evidence that competitive responsiveness is asymmetric.

This research investigates the impact of a large-scale assortment reduction on customer retention, utilizing a model we develop to explore the effect on sales at both the store level and the category level simultaneously. We apply our model to a data set provided by an online grocer. The data contain detailed household purchase records for every category in the store. Our results indicate that the reduction in assortment reduces overall store sales, a result that contrasts with that of all of the recent studies on assortment reductions (Food Marketing Institute. 1993. Variety or duplication: A process to know where you stand. Prepared by Willard Bishop Consulting and Information resources, Inc., in cooperation with Frito Lay; Drèze, Xavier, Stephen J. Hoch, Mary E. Purk. 1994. Shelf management and space elasticity. J. Retailing 70(4) 301–326; Broniarczyk, Susan M., Wayne D. Hoyer, Leigh McAlister. 1998. Consumers' perceptions of the assortment offered in a grocery category: The impact of item reduction. J. Marketing Res. 35(May) 166–176; Boatwright, Peter, Joseph C. Nunes. 2001. Reducing assortment: An attribute-based approach. J. Marketing 65(July) 50–63; Boatwright, Peter, Joseph C. Nunes. 2004. Correction note for “Reducing assortment: An attribute-based approach.” J. Marketing. Forthcoming). We find the reduction had a negative effect on both shopping frequency and purchase quantity, and we find that the decline in shopping frequency resulted in a greater loss than did the reduction in purchase quantities. We also find that the impact of the assortment cut varies widely by category, with less-frequently purchased categories more adversely affected. The variation in the assortment reduction's impact across categories suggests that managers compare select categories in order to moderate the overall loss in sales.

In this paper we describe the pass-through behavior of a major U.S. supermarket chain for 78 products across 11 categories. Our data set includes retail prices and wholesale prices for stores in 15 retail price zones for a one-year period. For the empirical model, we use a reduced-form approach that focuses directly on equilibrium prices as a function of exogenous supply- and demand-shifting variables. The reduced-form approach enables us to identify the theoretical pass-through rate without specific assumptions about the form of consumer demand or the conduct of a category-pricing manager. Thus, our measurements of pass-through are not constrained by specific structure on the underlying economic model. The empirical pricing model includes costs of all competing products in the category on the right-hand side (not only the cost of the focal brand) and yields estimates of both own-brand and cross-brand pass-through rates. Our results provide a rich picture of the retailer's pass-through behavior. We find that pass-through varies substantially across products and across categories. Own-brand pass-through rates are, on average, more than 60% for 9 of 11 categories, a finding that is at odds with the claims of manufacturers about retailers in general. Importantly, we find substantial evidence of cross-brand pass-through effects, indicating that retail prices of competing products are adjusted in response to a change in the wholesale price of any given product in the category. We find that cross-brand pass-through rates are both positive and negative. We explore determinants of own-brand and cross-brand pass-through rates and find strong evidence in multiple categories of asymmetric retailer response to trade promotions on large versus small brands. For example, brands with larger market shares, and brands that contribute more to retailer profits in the category, receive higher pass-through. We also find that trade promotions on large brands are less likely than small brands to generate positive cross-brand pass-through, i.e., induce the retailer to reduce the retail price of competing smaller products. On the other hand, small share brands are disadvantaged along three dimensions. Trade promotions on small brands receive low own-brand pass-through and generate positive cross-brand pass-through for larger competing brands. Moreover, small share brands do not receive positive cross pass-through from trade promotions on these larger competitors. We also find that store brands are similarly disadvantaged with respect to national brands.

We examine box-office sales in the context of a market share model. This is accomplished by developing a combination of a sliding-window logit model and a gamma diffusion pattern in a hierarchical Bayes framework. We show that accounting for the full choice set available every week not only increases the fit of weekly movie sales but also leads to parameter estimates that depict a richer picture of the movie industry. We show that movie studios appear to have a good understanding of the products they produce, knowing when to support them and when not to. We also show that the effect of the number of opening week screens is overestimated in traditional models. Our research indicates that actors have a direct and directors an indirect effect on consumers’ movie choice. Releasing a movie contemporaneously with other movies of the same genre adversely affects box-office performance all around. Releasing a movie against movies of the same Motion Picture Association of America (MPAA) rating hurts its sales in the beginning, but there is a displacement effect, which leads to a less severe sales loss in the long run.

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.

The retail trade today is increasingly dominated by large, centrally managed “power retailers.” In this paper, we develop a channel model in the presence of a dominant retailer to examine how a manufacturer can best coordinate such a channel. We show that such a channel can be coordinated to the benefit of the manufacturer through either quantity discounts or a menu of two-part tariffs. Both pricing mechanisms allow the manufacturer to charge different effective prices and extract different surpluses from the two different types of retailers, even though they both have the appearance of being “fair.” However, quantity discounts and two-part tariffs are not equally efficient from the manufacturer’s perspective as a channel coordination mechanism. Therefore, the manufacturer must judiciously select its channel coordination mechanism. Our analysis also sheds light on the role of “street money” in channel coordination. We show that such a practice can arise from a manufacturer’s effort to mete out minimum incentives to engage the dominant retailer in channel coordination. From this perspective, we derive testable implications with regard to the practice of street money.

Almost universally, research and practice suggest that a brand that increases its product assortment, or variety, should benefit through increased market share. In this paper, we show this is not always the case. We introduce the construct “assortment type” and demonstrate that the effect of assortment size on brand share is systematically moderated by assortment type. We define an “alignable” assortment as a set of brand variants that differ along a single, compensatory dimension such that choosing from that assortment only requires within-attribute trade-offs. In contrast, we define a “nonalignable” assortment as a set of brand variants that simultaneously vary along multiple, noncompensatory dimensions, demanding between-attribute trade-offs. In turn, we argue that an alignable assortment can efficiently meet the diverse tastes of consumers, thereby increasing brand share, but that a nonalignable assortment increases both the cognitive effort and the potential for regret faced by a consumer, thereby decreasing brand share. We term this effect “overchoice.” Across three studies, we provide evidence of overchoice and tie the effect to the effort and regret brought about by nonalignability. In the process, we demonstrate that simplification of information presentation, reversibility of choice, and a reduction in underlying nonalignability serve to reduce or eliminate this effect.

Today’s managers are very interested in predicting the future purchasing patterns of their customers, which can then serve as an input into “lifetime value” calculations. Among the models that provide such capabilities, the Pareto/NBD “counting your customers” framework proposed by Schmittlein et al. (1987) is highly regarded. However, despite the respect it has earned, it has proven to be a difficult model to implement, particularly because of computational challenges associated with parameter estimation. We develop a new model, the beta-geometric/NBD (BG/NBD), which represents a slight variation in the behavioral “story” associated with the Pareto/NBD but is vastly easier to implement. We show, for instance, how its parameters can be obtained quite easily in Microsoft Excel. The two models yield very similar results in a wide variety of purchasing environments, leading us to suggest that the BG/NBD could be viewed as an attractive alternative to the Pareto/NBD in most applications.

An important question that firms face in advertising is developing effective media strategy. Major improvements in the quality of consumer information and the growth of targeted media vehicles allow firms to precisely target advertising to consumer segments within a market. This paper examines advertising strategy when competing firms can target advertising to different groups of consumers within a market. With targeted advertising, we find that firms advertise more to consumers who have a strong preference for their product than to comparison shoppers who can be attracted to the competition. Advertising less to comparison shoppers can be seen as a way for firms to endogenously increase differentiation in the market. In addition, targeting allows the firm to eliminate “wasted” advertising to consumers whose preferences do not match a product’s attributes. As a result, the targeting of advertising increases equilibrium profits. The model demonstrates how advertising strategies are affected by firms being able to target pricing. Target advertising leads to higher profits, regardless of whether or not the firms have the ability to set targeted prices, and the targeting of advertising can be more valuable for firms in a competitive environment than the ability to target pricing.

Product reviews by third parties are growing in popularity. This paper examines when and how a manufacturing firm should adapt its marketing strategies to such reviews. For example, should a firm receiving an unfavorable review reduce its price or adjust its advertising? Should a winning product of a product review (e.g., “editor’s choice”) boost its advertising expenditure to spread the good news? How should firms’ strategic responses to product reviews differ across different types of product reviews (description vs. recommendation) and different advertising media (the reviewer’s publication vs. other media)? We develop a theory to address these issues and derive firms’ optimal responses to product reviews under different product/market/review/media conditions. We show that firms should choose advertising rather than price as a strategic variable in response to product reviews when enough consumers value horizontal product attributes. Surprisingly, we find that using a review-endorsed advertising format (i.e., advertisements containing third-party award logos) to broadcast its victory can hurt the winning product of a product review. Also, it is not necessarily wise for the winning products to boost advertising expenditures to spread the good news. Data from two industries—printers and running shoes—are used to illustrate some of our findings.