Managing Retail Budget Allocation between Store Labor and Marketing Activities

Abstract

The performance of a retail store depends on its ability to attract customer traffic, match labor with incoming traffic, and convert the incoming traffic into sales. Retailers make significant investments in marketing activities (such as advertising) to bring customers into their stores and in‐store labor to convert that traffic into sales. Thus, a common trade‐off that retail store managers face concerns the allocation of a store's limited budget between advertising and labor to enhance store‐level sales. To explore that trade‐off, we develop a centralized model to allocate limited store budget between store labor and advertising with the objective of maximizing store sales. We find that a store's inherent potential to drive traffic plays an important role, among other factors, in the relative allocation between advertising and store labor. We also find that as advertising instruments become more effective in bringing traffic to stores, managers should not always capitalize this effectiveness by increasing their existing allocations to advertising. In addition, we discuss a decentralized setting where budget allocation decisions cannot be enforced by a store manager and present a simple mechanism that can achieve the centralized solution. In an extension, we address the budget allocation problem in the presence of marketing efforts to shift store traffic from peak to off peak hours and show that our initial findings are robust. Further, we illustrate how the solution from the budget allocation model can be used to facilitate store level sales force planning/scheduling decisions. Based on the results of our model, we present several insights that can help managers in budget allocation and sales force planning.

Impacts of the COVID‐19 pandemic on grocery retail operations: An analytical model

“…In line with our model, Perdikaki et al. ( 2017 ) allow sales to decrease with store traffic at high store traffic levels. Consequently, they find it is not optimal to increase the advertising budget (which boosts store traffic) when advertising is more effective.…”

Dynamic Marketing Resource Allocation with Two-Stage Decisions

“…To deal with a fixed marketing budget, a more specific area of interest within this broader space is studying how to allocate the limited budget to several promotion activities. Perdikaki et al [20] proposed an optimization centralized model for budget allocation between store labor and marketing activities such as advertising with the objective of maximizing store sales. Ban and Rudin [21] studied a newsvendor decision-maker to make a sensible ordering decision according to past information about various features of the demand.…”

Financing decisions in a supply chain when considering product returns

“…Jin et al 23 consider the effect of contract type and decision right of sales promotion when the retailer has limited capital. Perdikaki et al 24 explore how to allocate limited store budget between store labor and advertising with the objective of maximizing store sales. Zhou et al 25 discuss the optimal advertising and ordering policy of capital‐constrained retailers who can obtain financial support from banks and suppliers.…”