Managing Advertising and Promotion for Long-Run Profitability

Abstract

In recent years, manufacturers have become increasingly disposed toward the use of sales promotions, often at the cost of advertising. Yet the long-term implications of these changes for brand profitability remain unclear. In this paper, we seek to offer insights into this important issue. We consider the questions of i) whether it is more desirable to advertise or promote, ii) whether it is better to use frequent, shallow promotions or infrequent, deep promotions, and iii) how changes in regular prices affect sales relative to increases in price promotions. Additional insights regarding brand equity, the relative magnitude of short- and long-term effects, and the decomposition of advertising and promotion elasticities across choice and quantity decisions are obtained. To address these points, we develop a heteroscedastic, varying-parameter joint probit choice and regression quantity model. Our approach allows consumers' responses to short-term marketing activities to change in response to changes in marketing actions over the long term. We also accommodate the possibility of competitive reactions to policy changes of a brand. The model is estimated for a consumer packaged good category by using over eight years of panel data. The resulting parameters enable us to assess the effects of changes in advertising and promotion policies on sales and profits. Our results show that, in the long term, advertising has a positive effect on “brand equity” while promotions have a negative effect. Furthermore, we find price promotion elasticities to be larger than regular price elasticities in the short term, but smaller than regular price elasticities when long-term effects are considered. Consistent with previous research, we also find that most of the effect of a price cut is manifested in consumers' brand choice decisions in the short term, but when long-term effects are again considered, this result no longer holds. Last, we estimate that the long-term effects of promotions on sales are negative overall, and about two-fifths the magnitude of the positive short-term effects. Finally, making reasonable cost and margin assumptions, we conduct simulations to assess the relative profit impact of long-term changes in pricing, advertising, or promotion policies. Our results show regular price decreases to have a generally negative effect on the long-term profits of brands, advertising to be profitable for two of the brands, and increases in price promotions to be uniformly unprofitable.Long-Term Effects, Promotions, Advertising, Price Sensitivity, Scanner Data, Choice, Purchase Quantity, Switching Regression

Optimal Advertising and Promotion Budgets in Dynamic Markets with Brand Equity as a Mediating Variable

“…To this end, we formulate and estimate a demand model wherein the long-term effects of these variables are modeled with brand equity as the mediating variable. This is in contrast to most of the extant literature (with the exception of Jedidi, Mela, and Gupta 1999) which examines the long-term implications of these marketing actions with sales or market share as the mediating variable (see, for example, Dekimpe and Hanssens 1999;Naik, Raman, and Winer 2005). The use of brand equity as a mediating variable allows us to examine whether there are adverse long-term consequences of, say, sales promotions, even if their impact in the short-term on the brand's sales and profitability is positive.…”

“…Given the need to meet short-term sales and market share objectives, brand managers in packaged goods firms are under pressure to increase or maintain high sales promotion spending at the expense of advertising (Low and Mohr 2000). However, with documented evidence of the possible detrimental effects of sales promotions over the long-term (Mela, Gupta, and Lehman 1997;Papatla and Krishnamurthi 1996;Jedidi, Mela, and Gupta 1999), managers in many consumer packaged goods firms are trying to increase their expenditures on brand building activities such as advertising while cutting down their sales and trade promotion budgets. For example, starting in the early 1990s, Procter & Gamble reduced its trade promotion spending and adopted an everyday low pricing strategy (Reitman 1992) while increasing its advertising expenditures (Ailawadi, Lehmann, and Neslin 2001).…”

“…Our demand side model is similar in spirit to Jedidi, Mela, and Gupta (1999) in that we model the long-term (potentially negative) effects of sales promotions and advertising with brand equity as the mediating variable. However, we present an alternative way of modeling dynamic parameters using the Kalman filter.…”

The Impact of Marketing Communications on Buying Silver Online: Study on Young Generation’s Perception in Malaysia

“…According to Jedidi, Mela and Gupta [8], advertising brings both short and long-term effect in terms of increasing consumer's brand choice utility and reducing their price sensitivity.…”

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“…Para Jedidi et al (1999) mientras que la publicidad tiene un efecto positivo en el largo plazo sobre el valor de marca, las promociones tienen un efecto negativo. Estos autores encuentran que muchos de los efectos de la reducción de precios se manifiestan en las decisiones de marca del consumidor en el corto plazo, pero cuando son considerados los efectos en el largo plazo estos resultados ya no se sostienen.…”