Advertising and price effectiveness over the business cycle DEPARTMENT OF MARKETING AND ORGANISATION STUDIES (MO)

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1 Fauly of Business and Eonois Adverising and prie effeiveness over he business yle M.J. Gijsenberg H.J. van Heerde M.G. Dekipe and J.-B.E.M. Seenkap DEPARTMENT OF MARKETING AND ORGANISATION STUDIES (MO) OR 090

2 ADVERTISING AND PRICE EFFECTIVENESS OVER THE BUSINESS CYCLE Maaren J. Gijsenberg Harald J. van Heerde Marnik G. Dekipe Jan-Benedi E.M. Seenkap June 009 Maaren J. Gijsenberg is a Dooral Candidae a he Caholi Universiy of Leuven and Researher in Markeing a he Louvain Shool of Manageen & FUCaM (e-ail: aaren.gijsenberg@fua.a.be). Harald J. van Heerde is Professor of Markeing a he Waikao Manageen Shool Universiy of Waikao (e-ail: heerde@ng.waikao.a.nz). Marnik G. Dekipe is Researh Professor of Markeing & CenER Fellow a Tilburg Universiy and Professor of Markeing a he Caholi Universiy of Leuven (e-ail:.g.dekipe@uv.nl). Jan- Benedi E.M. Seenkap is C. Kno Massey Disinguished Professor of Markeing and Markeing Area Chair Kenan-Flager Business Shool Universiy of Norh Carolina a Chapel Hill (e-ail: jbs@un.edu).

3 ADVERTISING AND PRICING EFFECTIVENESS OVER THE BUSINESS CYCLE Absra In his sudy he auhors ondu a syseai invesigaion on he evoluion in he effeiveness of wo iporan arkeing i insruens adverising and prie over he business yle. Analyses are based on 63 branded produs in 37 aure CPG aegories in he UK and his for a period of 5 years. The daa are a obinaion of (i) onhly naional sales daa (ii) onhly adverising daa (iii) daa on he general eonoi ondiions and (iv) onsuer survey daa. Consuers are shown o be ore prie sensiive during onraions. In addiion spending paerns will be less onsisen iplying saller brand loyaly. Adverising elasiiies however do no see o be affeed by eonoi downurns. Produ involveen was shown o be an influenial oderaor of he final effe of adverising prie and arry-over effes on sales. Finally alhough shor run effeiveness of prie differs beween epansions and onraions he long run effeiveness of boh adverising and prie is no alered by differenes in he general eonoi ondiions. Key words: Adverising Prie Effeiveness Business Cyle ie-series eonoeris Bayesian inferene

4 . Inroduion Firs are under ever inreasing pressure o jusify heir arkeing ependiures. One onsidered ere oss hese ependiures are ore and ore reaed as invesens ha should deliver shareholder value (e.g. Srivasava e al. 999). Iproveen of he perforane and aounabiliy of heir organizaions are onsequenly op onerns for senior arkeing anagers (CMO Counil 009) sine opanies are ore ineresed han ever in undersanding and easuring he reurns being obained fro arkeing invesens (Markeing Siene Insiue 008). This evoluion owards greaer aounabiliy is reinfored in ies of eonoi onraions as every dollar sars o aer ore. Firs faing diffiul ies ighen heir bels and arkeing budges are aong he firs o be reonsidered (MKinsey Global Survey 009). The reen eonoi downurn is no eepion o his (The Finanial Ties 008). Lae 008 Toyoa Moor USA for eaple announed a u of 0% aross all arkeing budges while GM announed eonoizing up o $600 illion on is adverising and prooion budge up o 0. By January 009 7% of all arkeing anagers had redued heir adverising budges while 77% was planning o u heir edia ependiures (AdAge 009). These eaples illusrae ha as he eonoy ools down anagers feel even ore srongly he need o reonsider heir arkeing invesens. While here eiss a onsiderable body of lieraure on arkeing-i effeiveness and elasiiies in general (see e.g. Bijol e al. 005; Hanssens 009 for reen overviews) previous researh has no linked his o he business yle. Does he effeiveness of arkeing i insruens vary aross he business yle and if so in wha direion? Wha is he agniude of he variaion? Are here differenes aross arkeing i insruens aross brands and/or aross aegories? Alhough he subje of an inense debae no syseai effor has been underaken o provide answers o hese quesions. Fro a anagerial poin of view insigh ino hese quesions helps opanies in forulaing heir response o eonoi downurns. I provides he wih a beer undersanding of he effeiveness of heir invesens. This enables he o beer spread igher budges over he differen arkeing i insruens hereby answering he all for iproved perforane and aounabiliy of he arkeing 3

5 organizaion. Fro an aadei poin of view i is iporan o undersand how he effeiveness of arkeing i insruens varies syseaially over he business yle. A good undersanding of his evoluion is likely o add o our undersanding of oher observed phenoena as well. Privae label suess for insane has been shown o ehibi ylial paerns wih syseai arke share gains during downurns (Laey e al 007). The purpose of he urren sudy is o provide insighs in hese issues for wo iporan arkeing i insruens viz. Adverising and Prie. The reainder of his paper is sruured as follows. We firs review he previous lieraure (Seion ) and desribe how and why arkeing effeiveness ay vary aross he business yle (Seion 3). We subsequenly eplain he eraion of he business yle oponens and he applied ehodology in assessing he ipa of he business yle on adverising effeiveness (Seion 4). Ne we desribe our daa (Seion 5) and presen our epirial findings (Seion 6) and anagerial ipliaions (Seion 7).. Relevan lieraure The presen sudy inegraes hree lines of researh. Sine he early days of arkeing researh adverising and priing effeiveness have been he subje of nuerous sudies aking he aong he bes overed issues in arkeing siene. More reenly a body of researh fousing on arkeing deisions over he business yle has eerged. Adverising effeiveness Adverising effeiveness has been he fous of an ipressive body of researh (e.g. Labin e al. 975; Vakrasas and Abler 999; for reen overviews see Tellis and Abler 007 or Hanssens 009). One of he firs epirial generalizaions in he doain was derived by Clarke (976) who showed ha 90% of he uulaive ipa of adverising on sales ourred wihin onhs (and no years) of he adveriseen. The adverising arry-over paraeer of he Koyk odel whih was driving his resul was repored o have a grand ean of 0.76 (Clarke 976). Assuss e al. (984) analyzed 8 sudies assessing he ipa of adverising on 4

6 sales. They found he shor-run adverising elasiiy o have a grand ean of 0.. In addiion hey showed ha no aouning for arry-over effes of adverising lead o onsiderable biases in he esiaed shor run effeiveness. A ea-analysis by Sehuraan and Tellis (99) found he average shor-run adverising elasiiy o be only half of he previously enioned value (0.09) aording o he auhors a possible onsequene of people beoing ore used o adverising. Adverising has been shown o be relaively less effeive for aure versus new produs (Lodish e al. 995). The auhors also poined ou ha spending ore ay no resul in inreased sales for well esablished and frequenly adverising brands indiaing ha hey ay already be adverising a sauraion levels. Oher sudies showed adverising effeiveness o vary syseaially wih he level of involveen wih he produ (Krugan 965) and he pereived risk assoiaed wih buying he produ (Sheh and Venkaesan 968). Based on hese insighs we will onrol for produ lass and involveen when assessing he ipa of eonoi fluuaions on adverising effeiveness. In addiion we will epliily allow for arry-over effes. Prie effeiveness No surprisingly also he quanifiaion of he prie effeiveness has reeived onsiderable researh aenion. In a firs large-sale ea-analysis Tellis (988) overed over 367 elasiiies relaed o 0 differen brands or arkes. The repored ean of -.76 was onsiderably larger han he average adverising elasiiy. A new ea-analysis by Bijol e al. (004) based on 85 elasiiies found he average prie elasiiy o be onsiderably higher han he one repored by Tellis (988) i.e Higher inflaion levels in addiion were found o inrease he prie sensiiviy espeially in he shor run. Siilar o adverising elasiiies variaion of prie elasiiies aross brands and aegories has been douened. Sion (979) found a U-shaped relaionship beween he agniude of prie elasiiies and he produ life yle while Tellis (988) repored sronger prie sensiiviies in he laer sages of he produ life yle. Bijol e al. (004) in urn repored delining elasiies over he PLC. Finally Sehuraan and Tellis (99) eained he prie/adverising elasiiy raio. They repored higher raios for ore aure produs whih 5

7 iplies ha lowering pries ay be ore profiable han inreasing adverising for suh aegories. Markeing deision aking over he business yle Clearly boh arkeing insruens have been sudied eensively in prior researh. However we are no aware of any sudies ha have syseaially linked hese insruens effeiveness o he sae of he eonoy and is evoluion hrough subsequen epansions and onraions. Though he linkage beween suh aro-eonoi fluuaions and arkeing deision aking in onras has reeived inreasing aenion over he las few years as reviewed in Table. A reurring finding in hese sudies is he fa ha ouner-ylial adverising aions during eonoi downurns an reae value for he opany (Frankenberger & Graha 003; Srinivasan e al. 005; Deleersnyder e al. 009; Srinivasan and Lilien 009) whih has been aribued indirely o a presued higher effeiveness during hose periods. Oher sudies have foused on he level of arkeing spending during onraions and epansions. Deleersnyder e al. (009) showed ha adverising ependiures are pariularly sensiive o business yle fluuaions wih srong inreases during epansions and dereases during onraions. Suh pro-ylial adverising behavior in obinaion wih an inreased prie awareness during less favorable eonoi ondiions (Eselai e al. 00) has been linked wih higher privae label growh (Laey e al. 007; Deleersnyder e al. 009). Privae label share no only follows a ouner-ylial paern bu also shows deepness and seepness asyeries wih higher and faser growh during onraions and saller and slower deline during epansions (Laey e al. 007). Pro-ylial behavior in urn has also been observed in he one of new-produinroduions where fewer new produs end o be be inrodued during eonoi downurns (e.g. Devinney 99; Aarloglou 003). Moreover pro-ylial sales endenies wheher or no due o pro-ylial arkeing ependiures oreover are a widespread phenoenon for branded produs. They do no only eis in CPG arkes bu are also repored in durables arkes whih also end o ehibi a faser deline han reovery (Deleersnyder e al. 004). 6

8 Table. Previous sudies on arkeing deisions over he business yle Sudy Key Meri Main Findings Devinney (99) New Produ Inroduions Fewer new produs are launhed during eonoi downurns Eselai e al. (00) Consuer Prie Knowledge Consuers are less prie aware in eonoi upbea ies Aarloglou (003) New Produ Inroduions Fewer new produs are launhed during eonoi downurns Frankenberger & Graha (003) Finanial Perforane Inreases in adverising ependiures (espeially in obinaion wih he inroduion of new produs) during rises reae added value Deleersnyder e al. (004) Durables Sales Durables show a pro-ylial sales paern Seepness asyery: deline is faser han reovery Srinivasan e al. (005) Fir Perforane Pro-aive arkeing during onraions an be benefiial for brands wih a sraegi ephasis on arkeing Laey e al. (007) Privae Label Sales Privae label sales are higher during onraions Deepness and seepness asyeries: deline is sronger and faser han reovery. Par of he privae-label gain during onraions Deleersnyder e al. (009) Adverising Spending Privae Label Sales Fir Perforane Adverising spending shows a pro-ylial paern More pro-ylial adverising spending is assoiaed wih higher privae label growh Lower sok prie perforane for opanies wih pro-ylial adverising paerns Srinivasan and Lilien (009) Finanial Perforane Inreased R&D spending during onraions lower profis in BB and BC Inreased adverising spending during onraions inrease profis in BB and BC Effes las he year afer he onraions This overview shows he inreasing aenion for he linkage beween arkeing deision aking and he sae of he eonoy. These sudies however provide lile o no evidene on he effeiveness of hese deisions under differen (epansion versus onraion) ondiions. To address his issue we derive he adverising and prie elasiiy of over 60 branded produs in lose o 40 CPG aegories. This will allow us o no only derive epirial generalizaions bu also o deerine wheher all brands/aegories are equally affeed by hanging eonoi ondiions. The daa span over 5 years of onhly daa. The lengh of he ie series allows us o over uliple business yles. As a resul inferenes will no be driven by he idiosynrasies of one speifi epansion or onraion period (for a siilar reasoning see Deleersnyder e al. 7

9 009 who also over uliple business yles). The disaggregae naure of he series wih heir onhly observaions helps us o resolve wo iporan issues. Firshe periodiiy of business yles is.5 o 8 years (e.g. Burns and Mihell 946; Chrisiano and Fizgerald 998). When using annual daa he Nyquis frequeny i.e. he highes frequeny abou whih dire inforaion is available orresponds o a oponen of years (Granger and Haanaka 964; Vilasuso 997). Higher frequeny phenoena i.e. shor run fluuaions wih a duraion of less han years would hene no be reoved fro he daa series. More disaggregaed daa on he onrary enable us o eliinae hose higher frequenies as well. Seond fro a arke response perspeive annual daa would inrodue an aggregaion bias in our analyses and inferenes (see e.g. Hanssens e al. 00). The usage of onhly daa will iigae his proble. 3. Fraework and Hypoheses The onepual fraework guiding our work is depied in figure. We argue sales o depend on wo ain ypes of faors: arkeing-i relaed faors and aro-eonoi relaed faors. The final effes of hese faors on sales are affeed by he level of produ-involveen he onsuers show in he produ aegory. 3. Cylial sensiiviy of sales Eonoi downurns have a dire ipa on boh he abiliy and he willingness of onsuers o spend heir finanial eans. During eonoi sour ies onsuers have fewer eans a heir disposal. In addiion onsuers easily loose rus during onraions. As rus is a key faor in onsuers willingness o buy (e.g. Kaona 975; Kaakura and Gessner 986; Allenby e al 996) hey beoe hesian o spend heir oney. Consuers have also been shown o easily swih o privae-label offerings during eonoi downurns (Laey e al 007) whih furher redues he sales of branded produs. As suh we epe a negaive ain effe of an eonoi onraion on brand sales. 8

10 3. Cylial sensiiviy of arkeing effeiveness Adverising. Alhough he overall elasiiies have been found o be raher sall (Asuss e al. 984; Sehuraan and Tellis 99) adverising sill has a posiive effe on sales. During eonoi downurns his elasiiy ay inrease. Overall reduions in adverising budges (e.g. Deleersnyder e al 009) will give firs beer hanes in reahing he usoer as he firs fae less opeiive luer (Danaher e al. 008). A he sae ie edia raes are lower during onraions (e.g. AdAge 009). Furher inreased adverising spending during eonoi igh ies has been shown o posiively influene fir profis (Srinivasan and Lilien 009) iplying possibly higher adverising effeiveness. These profis on he oher hand ay also be higher as a onsequene of prie inreases during downurns (e.g. Bakus and Kehoe 99; Roeberg and Saloner 986; Roeberg and Woodford 999; Deleersnyder e al. 004) wihou adverising beoing ore effeive. By eans of suh prie inreases firs ry o ake up for redued sales quaniies hus preserving overall profis. In addiion during onraions onsuers fous ore on he funional aspes of produs insead of hedoni aspes as e.g. brand iage buil by adverising (e.g. Ang e al. 000). As a onsequene hey ay show lower reaiviy o adverising hus lowering he effeiveness of he adverising invesens. The ne effe of hese proesses on adverising elasiiy is no lear a priori. Figure. Conepual fraework. Eonoi downurn Involveen Sales Adverising Prie Carry-over Priing. In heir 005 ea-analysis Bijol e al show ha he average prie-elasiiy equals -.6. Coon sense ells ha during eonoi downurns his elasiiy will beoe even ore negaive (e.g. Blok 979). Consuers disposable inoe is usually lower in suh 9

11 periods reaing a higher level of prie awareness and fosering a searh for lower pries (Wakefield and Inan 993; Eselai e al 00). They epress sronger appreiaion for prie us (Quelh 008) and are shown o swih o lower pried privae label offerings (e.g. Quelh and Harding 996; Ang e al 000; Laey e al 007). We herefore epe an inrease in he agniude of prie elasiiies during eonoi downurns Carry-over. Besides he shor run effeiveness of adverising and priing as apured by he previous variables we are also ineresed in heir long-run perforane. The long run perforane ay no only hange as a onsequene of hanging shor-run elasiiies bu also beause of differen arry-over effes aross he business yle as brand loyaly is likely o be lower during onraions. Firs when he eonoy urns sour onsuers eperiene a larger pressure on heir disposable inoe. As a onsequene hey show sronger swihing behavior and less brand loyaly (Chane and Frenh 97). A eah deision onsuers will engage in inreased inforaion gahering hereby evaluaing several alernaive opions o ge he aiu ou of heir saller budges (e.g. Blok 979; Wakefield and Inan 993). Seond lower brand loyaly will ranslae ino lower arry-over effes as brand loyaly iplies a onsisen purhase of he brand over ie (Keller 993; Assael 998). Sronger swihing behavior iplies less onsisen purhase paerns and hene redued arry-over. We onsequenly epe arry-over effes o be saller during eonoi sour ies. 3.3 The oderaing role of involveen Involveen is ypially defined as he subjeive perepion of he personal relevane of an obje aiviy or siuaion (Van Trijp e al 996). Involveen will be higher wih produs ha show onsiderable perforane risk and syboli value (Lauren and Kapferer 985). In high involveen produ aegories onsuers engage in ore profound inforaion gahering and deision aking proesses (Bloh e al. 986; Assael 998). Adverising essages for eaple will be ore aively proessed (e.g. Pey e al. 983). A he sae ie deisions will no be based on jus one or wo faors bu will be uli-diensional wih onsuers evaluaing a larger se of rieria (Park and Mial 985). As a onsequene he relaive weigh of eah rierion will be saller and effes on he final sales deision will be soohed by effes of oher faors. Lower involveen aegories on he oher hand do no require suh in- 0

12 deph proesses as e.g. he assoiaed risk will be lower (Hoyer 984; Hawkins and Hoh 99). In suh aegories people will rely ore on heurisis in order o redue heir ogniive effor (Tversky and Kahnean 974) hereby basing heir deisions on very lile inforaion. Aong he os used heurisis are e.g prie brand awareness adverising and previous purhases (Desphandé 98; Hoyer 984; Warringon and Shi 000). These heurisis end o reain a doinan effe even afer uliple sapling opporuniies of oher brands (e.g. Hoyer and Brown 990). Given he soohing effe in he ore elaborae higher involveen produ deisions relaive o he aplifiaion effe of he use of siple heurisis in lower involveen produ deisions we epe he effe of eernal ues like arkeing i insruens and aro-eonoi evoluions o be iigaed by he level of produ involveen. This in urn resuls in lower adverising and prie elasiiies for higher involveen produs. This effe will be reinfored during onraions wih he ipa of onraions on he adverising and prie elasiiies being saller for higher involveen produs. Brand loyaly he onsisen purhase of he sae brand over ie (Keller 993; Assael 998) however an resul fro wo learly disin proesses. Brand loyaly has been argued o be one of he hoie heurisis whih are used o redue ogniive effor and siplify deisions aking for low involveen produs (e.g. Warringon and Shi 000). In suh ases brand loyaly is nohing ore han habiual buying behavior (e.g. Jeuland 979). Loyaly on he oher hand an also be he ouoe of in-deph inforaion gahering proesses in high involveen aegories. Consuers have evaluaed several differen opions in an elaborae proess and have onluded a erain brand o fi heir requireens bes (e.g. Newan and Saelin 97). Learning effes subsequenly will play an iporan role in subsequen deisions (Newan and Saelin 97; Punj and Saelin 983). Hene if higher involveen inreases loyaly arry-over is epeed o be higher for higher involveen aegories. Conversely if higher involveen aenuaes onsuer ineria arry-over will be lower for higher involveen aegories. The final effe is no lear a priori. 4. Mehodology In order o provide an answer o he issues raised in previous seions we propose a ehodology whih onsiss of hree seps. Firs we era he ylial oponen in he aro-

13 eonoi indiaor series using a business yle filer and deerine onraion and epansion periods. Ne we forulae a odel whih quanifies he adverising and priing elasiiies boh during onraions and epansions. Finally we eplain ross-aegory variaion in he ylial sensiiviy of hese elasiiies. Eraing he ylial oponen To assess he ipa of business yles on arkeing i effeiveness we firs have o era he ylial oponen fro he GDP series as he laer is a resul of slowly evolving seular rends a ylial oponen and rapidly varying seasonal and irregular oponens (Baer and King 999). In order o do so we adop he widely used Baer-King (999) bandpass filer (e.g. Sok and Wason 999; Deleersnyder e al 004). This filer deoposes he GDP series in a gradually evolving long run rend oponen and ylial fluuaions around i he fous of our ineres. The BK bandpass filer ries o isolae yles wih period lenghs beween 6 and 3 quarers whih orresponds o he ypial lengh of business yles (e.g. Burns and Mihell 946; Chrisiano and Fizgerald 998). The filer iself is a syeri oving average filer: C j () GDP = a j L GDP K j= K C where GDP is he filered series fro he original ie series GDP wih a he weighs orresponding o he differen leads and lags. These weighs are given in appendi A. K he nuber of inluded leads and lags is o be se equal o for quarerly daa (Baer and King 999). The resuling filered series is he business yle oponen series we are ineresed in. Alhough our sudy is based on onhly daa he leas aggregaed GDP series available is on a quarerly level. We herefore analyze he GDP series a he quarerly level and subsequenly ranslae our findings o he onhly level. In he arkeing lieraure on urbulen ies several sudies (e.g. Laey e al 007; Deleersnyder e al 009) adoped he Hodrik-Preso filer. Differing fro our sudy hese were based on annual daa. Baer and King (999) show ha heir BK bandpass filer is o be preferred for quarerly daa. The os opelling reason is he fa ha he BK filer also reoves he higher frequeny irregular variaion in he series soehing whih is no aouned for by he HP filer. The laer an herefore be regarded as he high-pass par of he BK bandpass j

14 filer. Whereas suh irregular shor run variaion is a less proinen issue in annual daa is reoval is an iporan feaure for quarerly daa. Afer he eraion of he ylial oponen we deerine he onraion and epansion periods. Periods during whih a deline in he ylial oponen is observed are aegorized as onraions. Periods wih an inrease in urn are aegorized as epansions. We inlude his dihooy in our analyses by eans of a /0 duy variable (see Laey e al. 007 for a siilar praie): C () If C GDP GDP < 0 hen Conraio = ; else = 0 n All onhs wihin a quarer whih is arked as a onraion will show a value of for he Conraion duy variable. The original GDP series he BK-filered ylial oponen and he assoiaed onraion and epansion periods are depied in figure. The blak line depis he original GDP series wih values on he lef ais. The doed grey line gives he ylial oponen wih values on he righ ais. Finally grey zones represen onraions whie zones epansions. Figure. GDP BK-filered GDP ylial oponen and onraion and epansion periods 3 4E+ GDP 3E+ 3E+ 5E+09 BK filered GDP 4E+09 3E+09 E+09 8E+ 6E+ 4E+ E+ E+ 993Q 994Q3 996Q 997Q3 999Q 000Q3 00Q 003Q3 005Q 006Q3 E+09 0 E+09 E+09 3E+09 4E+09 5E+09 GDP BK filered GDP 3

15 Assessing he ipa of he business yle on adverising and priing effeiveness When assessing he ipa of he business yle on adverising and priing effeiveness we fae he following odel requireens. Firs we wan o ake absraion of levels of ependiures enabling us o draw onlusions aross differen ypes of brands and aegories. Seond we allow he response paraeers o vary aross brands. Third he perforane of brands ay be inerrelaed wihin a aegory and hene we need o speify a full error ovariane sruure for eah aegory. Finally we need o aoodae he effes of oderaing variables preferably in a siulaneous esiaion sep for aial saisial effiieny. In line wih previous researh (e.g. Naik and Raan 998; Hanssens e al 00) we sar fro he following parial adjusen sales odel: b b b ln Sal = 0 + Conraion + (3) b b b + ln Sal + ε in whih b ln Sal b ln Adv b + b 3 ln Prie b + Trend is he naural logarih of he volue sales of brand b (b=...b) in aegory b 4 (= C) in onh (= T). Conraion is a duy variable equaling when he eonoy is in a onraion; 0 oherwise. b ln Adv is he naural logarih of he adverising ependiures of brand b whereas b ln Prie is he naural logarih of he prie of ha brand a ie. Finally we aoun for he effe of possible oher rending faors by inluding a deerinisi rend Trend (see e.g. Dekipe and Hanssens 995 for a siilar praie) and allow for arry-over effes by inluding he lagged dependen variable as eplanaion variable. Sine we speify he variables in naural logarihs we an ake absraion of he aual level of he invesens in our inerpreaions as he paraeer esiaes represen he respeive elasiiies. To aoun for he ylial sensiiviy of he arkeing i variables effeiveness we b b ne inrodue wo ineraion effes: Conraion * ln Adv and Conraion * ln Prie. We also invesigae o wha een he long run effeiveness of hese insruens ay vary aross epansions and onraions by inluding b Conraion * ln Sal. Finally by eans of he Trend we onrol for gradually hanging faors whih are no inluded in our odel. As soe 4

16 of hese faors ay evolve differenly beause of hanging overall eonoi ondiions we also add Conraio n * Trend o our odel: (4) ln Sal b = b b b 5 b 7 b Conraion Conraion Conraion + ln Sal + b *ln Adv * Trend ln Adv b + Conraion b b b b + + b 6 b 3 Conraion *ln Sal ln Prie + ε b b + Trend b 4 *ln Prie b As sales evoluions of brands wihin a aegory ay be orrelaed we assue ha he error veors ε = ( ε K ε B )' of eah aegory follow a ulivariae noral disribuion wih a full variane-ovariane ari per aegory: ε ~ MVN 0 Σ ). Sales of brands in differen aegories on he oher hand are assued no o be orrelaed. ( Eplaining ross-aegory differenes involveen: (5) (6) (7) b b In a final sep we relae he arkeing effeiveness paraeers and o produ b b i = i 0 ν for [ i i ] b b i = i 0 + i Involveen ν for i [ 356 ] + b b i = i 0 + i Involveen ν for i [ ] + i i We ean-ener he Involveen variable over he differen aegories whih allows us o forulae onlusions relaive o he average aegory. Unobserved drivers of odel paraeers ay ause he error ers in (5) (6) and (7) o be orrelaed as well so we assue ha hey follow a ulivariae noral disribuion wih a full variane-ovariane ari per brand: b b ( ν ' ')' ~ MVN ( 0 Ω). ν i i We esiae odel (4)-(7) wih Bayesian ehniques i.e. Gibbs sapling. The benefi of his approah over lassial approahes is ha a he sae ie (i) i an ore easily aoun for brand heerogeneiy as well as (ii) inra-aegory orrelaions (e.g. Rossi e al. 005) and (iii) i esiaes he oderaor effes siulaneously wih he oher paraeers raher han in a wo-sep approah. An overview of his proedure is given in appendi B. 5

17 Assessing long run perforane Based on our esiaions we analyze he long run effes of boh adverising and prie and how hey ay vary aross he business yle. Derived fro our parial adjusen sales odel speified in (4) we an define he long run effes as (e.g. Hanssens e al 00): b b b b 3 (8) adv LR = and b prie LR = during epansions b and (9) b b + 5 = and b ( + ) b* adv LR b b b = during onraions. b ( + ) b* prie LR b Signifianly differen shor run and arry over effes during onraions versus epansions do no iediaely iply signifianly differen long run effes. Boh shor run effeiveness and arry-over are esiaed values eah wih a onfidene inerval possibly wih opposing effes on he raio. Their obined effe will hene depend on he relaive sizes of hese inervals and on he orrelaions. In our Bayesian esiaion proedure we herefore also draw boh long run adverising and prie effeiveness as well as he hange in boh due o eonoi downurns. This allows us o alulae in a dire way onfidene inervals for hese long run effes as well as for heir differenes beween epansions and onraions. 5. Daa Monhly volue sales daa for 37 aure CPG aegories in he Unied Kingdo ( ) were provided by TNS UK. In eah aegory we seleed he op 5 branded produs whih were presen in he arke for a leas 95% of he ie. Thus our ie series for he individual brands are suffiienly long o over four business yles (e.g. Deleersnyder e al 004). In oal we were able o inlude 63 brands in 37 arkes in our saple. An overview of he inluded aegories is given in able. 6

18 Table. Overview of inluded produ aegories Produ Class Nuber of Caegories Eaples Food 5 Arifiial sweeeners Breakfas ereals Buer Tinned fruis Drinks 7 Frui juies and drinks Mineral waer Sofdrinks Tea Toileries 8 Bah addiives Denifrie Deodorans Shapoo Household Produs 7 Household leaner Mahine wash produs Toile Tissues Washing up produs Table 3 provides a se of suary saisis on he relaive sizes of he brands he evoluion of heir arke share over he 5-year period as well as he obined arke share wihin he aegory of he inluded brands. Alhough we onsisenly fous on he five larges brands wihin eah aegory srong variabiliy an be found boh in he average brand arke share over his period and in he arke share evoluion. The inluded brands oreover aoun for subsanially differen obined shares. Table 3. Marke share saisis Mean Spread Average brand arke share Average brand arke share evoluion (over he 5 years) Average uulaive arke share per aegory The neessary prie inforaion on hese brands was also obained fro TNS UK. These onhly sales and prie daa are subsequenly obined wih adverising daa ha were purhased fro NielsenMedia UK. These daa over all adverising ependiures by he individual brands we onsider aggregaed over Television Prin edia Oudoor Cinea Radio en Dire ail. We use daa on real GDP as a proy for he general eonoi aiviy. The ylial oponen of he GDP has proven o be a good indiaor of he overall eonoi yle as i inegraes business yles fluuaions aross any seors (Sok and Wason 999). GDP daa epressed in onsan pries were obained fro he OECD. All arkeing i series are inflaion-adjused by eans of he Consuer Prie Inde whih was also obained fro he OECD. 7

19 Finally inforaion on produ aegory haraerisis (in pariular Involveen) was obained hrough a large-sale onsuer survey (see e.g. Seenkap e al. 007 for an in-deph disussion). Involveen was defined in he spiri of Lauren and Kapferer (985) by inluding referenes o pereived risk and soial sybolis of he aegory and was easured on a fivepoin sale. Afer ean-enering values range beween and Copanies have been shown o adjus heir arkeing invesens in reaion o business yle hanges (e.g. Deleersnyder e al. 009). To obain insighs in he een o whih he brands in our saple adjus heir adverising and pries in a reaion o eonoi onraions we era he ylial oponens of heir adverising and prie series by applying he Baer- King band-pass filer. These ylial oponens are subsequenly regressed on he onraion duies. The business-yle filer however ay indue serial orrelaion (Engle 974). We herefore allow for an auoregressive error er when needed based on he BIC (for siilar praie see e.g. Laey e al. 007; Deleersnyder e al. 009). The resuls are shown in able 4. Table 4. Ipa of onraions on arkeing i deisions Inrease* Derease* No Change Adverising Prie *Signifian hanges a he 0.0 level. wo-sided es. Changes in arkeing invesens appear raher liied for he brands in our saple. Aong hose brands ha do hange heir invesens we observe large variaion in he deisions. Neverheles here are soe indiaions of he earlier repored endenies o derease adverising budges (Deleersnyder e al 009) and inrease pries (e.g. Bakus and Kehoe 99; Roeberg and Saloner 986; Roeberg and Woodford 999; Deleersnyder e al. 004). Of he 74 brands ha hus signifianly hange heir invesens in a leas one of he arkeing i insruens only odify heir ependiures on boh insruens. To es for overall signifiane of he hanges we applied he ehod of added Z s (Rosenhal 99). These ess showed ha pries are no signifianly inreased (p = 0.4 one-sided) whereas here are indiaions ha adverising ependiures are redued (p < 0.0 one-sided). 8

20 6. Epirial resuls The oeffiien esiaes are presened in able 5. They show he 95% poserior densiy inervals for he esiaes. These are prined in bold if zero is no inluded in he inerval. Table 5. Paraeer esiaes hypohesis.5 h perenile edian 97.5 h perenile Inerep Conraion Adverising Involveen Adverising*Conraion 5 0? Involveen 5? Prie Involveen Prie*Conraion Involveen Carry-over Involveen Carry-over*Conraion Involveen Trend 4 0? Trend*Conraion 7 0? Cylial sensiiviy of sales Eonoi downurns as suh do no see o ipa sales of he inluded brands. This ay be a onsequene of he fa ha os of hese CPG aegories an be onsidered neessiies. Purhases of suh produs are no likely o or anno be posponed unil he eonoi ondiions iprove. 9

21 Shor run arkeing effeiveness Adverising. Consisen wih Lodish e al. (995) and Aaan e al. (009) adverising elasiiies are found o be pariularly sall for hese ypes of aure onsuer goods ( 0 = 0.003). As we hypohesized higher involveen produs show signifianly saller adverising elasiiies ( = ). Alhough adverising will be proessed ore horoughly he ore elaboraed deisions proesses for higher involveen produs lower he relaive weigh and hene he effe on he final ouoe. Prie. As ould be epeed fro previous lieraure (e.g. Bijol e al. 004; Aaan e al. 009) prie elasiiies are found o be uh larger opared o adverising elasiiies ( 3 0 = -.075). Conrary o our prediions higher involveen produ aegories do no show saller prie elasiiies. Cylial sensiiviy of arkeing effeiveness Adverising. Business yles do no see o affe he shor run effeiveness of adverising. Nowihsanding arguens supporing boh an inrease and a derease of adverising effeiveness during eonoi onraions no signifian effes ould be found. Prie. As we epeed prie sensiiviy inreases during onraions ( 6 0 = -0.48). This effe however will be iigaed when he involveen wih he produ aegory is higher ( 6 = 0.590). Prie sensiiviy does inrease bu he effes will be sronger in hose aegories were deisions are usually based on siple heurisis like e.g. prie. More involveen and hene ore in-deph deision aking will sooh he effe of prie on aual sales. Long run arkeing effeiveness Long run effeiveness as (8) and (9) show depends on he shor run effeiveness of he arkeing i insruens and he arry-over effe of sales. We herefore firs repor he esiaion resuls for arry-over. Carry-over. Esiaed arry-over effes are raher sall ( 0 = 0.535). The effe however will be sronger for produs for whih onsuers rely on siple effor-reduing heurisis like e.g. he las brand purhased ( = -0.03). Carry-over effes in addiion are 0

22 signifianly saller during eonoi downurns ( 0 = -0.05) as onsuers are likely o show sronger swihing behavior and less onsisen buying paerns for naional brands during onraions (e.g. Chane and Frenh 97; Blok 979; Wakefield and Inan 993. No signifian differenes in he ipa of eonoi downurns on arry-over ould be found beween high and low involveen produs. The resuling esiaed values for he long run effeiveness of Adverising and Prie are repored in able 6. These are he esiaes for an average produ iplying a zero effe of Involveen. Table 6. Long run adverising and prie effeiveness for an average produ.5 h perenile edian 97.5 h perenile Long run Adverising effeiveness Epansion Δ Long run Adverising effeiveness * adv LR adv LR Long run Prie effeiveness Epansion Δ Long run Prie effeiveness * prie LR prie LR Long run effes are abou double he size of shor run effes (Adverising: vs 0.003; Prie: vs -.075). Alhough we find dereases in long run adverising effes * * ( = 0.00) and inreases in long run prie effes ( = 0.054) adv LR adv LR prie LR prie LR during onraions versus epansions none of hese hanges is signifian. Whereas he aial ipliaions of arkeing i deisions are hene alered by he posiion in he business yle long run sraegi ipliaions will say fairly onsan. 7. Disussion Suary Alhough arkeing effeiveness has been he subje of a wide srea of researh o he bes of our knowledge no sudy has invesigaed in a syseai way how general eonoi ondiions ay affe his effeiveness. We herefore invesigaed how adverising and prie

23 elasiiies evolve aross he business yle i.e. how hey differ in onraions vs epansions. Furher we eained o wha een evoluions ay be differen for differen levels of produ involveen. Analyses were based on 63 branded produs in 37 aure CPG aegories in he UK and his for a period of 5 years. We obined (i) onhly naional sales daa (ii) onhly adverising daa (iii) daa on eonoi aiviy and (iv) onsuer survey daa. Mos of he hypohesized effes were suppored as was shown in able 5. During onraions onsuers beoe ore prie sensiive. In addiion spending paerns will be less onsisen iplying saller brand loyaly. Adverising elasiiies however do no see o be affeed by eonoi downurns. Suh downurns in addiion do no show a dire effe on he sales of he inluded produs. As hese are ofen purhased produs whih ould be aegorized as neessiies posponing purhases unil he eonoy reovers is hene no an opion. Finally alhough shor run effeiveness of prie differs beween epansions and onraions he long run effeiveness of boh adverising and prie is no alered by differenes in he general eonoi ondiions. Managerial ipliaions Firs are under inreasing pressure o inrease boh he aounabiliy and he effeiveness of heir arkeing invesens. Our findings an help anagers in hoosing he righ sraegies when deiding on arkeing invesens aross he business yle. One of he enral quesions arkeing anagers have o deide on is how o alloae heir budges over prie reduions (by lowering he argins) and adverising aions. To provide answers o his quesion we base ourselves on he fraework developed by Dorfan and Seiner (954). In heir work he auhors argue ha arkeing budges should be alloaed relaive o he raios of he respeive elasiiies. More effeive insruens i.e. hose showing higher elasiiies hus reeive larger pars of he overall arkeing budge. As Sehuraan and Tellis (99) we herefore repor he prie/adverising elasiiy raios in epansion and onraions for produs wih differen levels of involveen. High and Low Involveen are defined as one sandard deviaion above and below he Average level Very High and Very Low as wo sandard deviaions above and below he Average level. The resuls are suarized in able 7. The hanges in he raios provide us wih an indiaion how relaive alloaion should be alered o iprove shor run perforane.

24 Overall prie/adverising raios are rearkably high. However he produ aegories under invesigaion are all well esablished aure CPG aegories. For suh produs adverising has been proven o be uh less effeive relaive o newer produs whereas prie does play a ore iporan role in purhase deision aking leading o higher raios relaive o newer produs (Sehuraan and Tellis 99). These indiae ha for suh aure produs firs an gain ore by reduing heir pries opared o invesing in adverising apaigns. The eree values for he High Involveen aegories are a onsequene of adverising showing very liied final effes on sales for suh produs (fr. Aaan e al. 009). Table 7. Prie-Adverising elasiiy raios Epansion Conraion % Change Very Low Involveen % Low Involveen % Average Involveen % High Involveen % Very High Involveen % In general firs are enouraged o inrease heir prie effors relaive o adverising in he shor run. For produs showing average involveen he shor run prie/adverising elasiiy raio inreases wih 4% during onraions. This is a onsequene of he inreased prie sensiiviy during onraions wih adverising sensiiviy reaining sable over he business yle. Sales gains are hene beer ahieved by prie reduions han by adverising inreases. For lower involveen aegories he hange in reoended relaive budge alloaion will be even sronger. Alhough adverising is ore effeive for hese produs resuling in lower overall raios prie sensiiviy will inrease uh sronger during onraions. As onsuers feel he pressure on heir redued budges he priing heurisi will beoe uh ore proinen in heir deisions for low-involveen produs. A lear shif in arkeing budges fro adverising o prie reduions is herefore warraned. However suh shifs fro adverising o prie effors are no reoended for all produ ypes. For very high involveen produ aegories he raio shows an opposie evoluion wih a relaive hange of he raio wih -5% owards adverising budges. This hange is no so uh a onsequene of hanges in adverising effeiveness. Adverising elasiiies are 3

25 ereely sall for suh aegories as is refleed in he very high values for he raios. Suh aegories however are haraerized by dereases of prie sensiiviy during onraions. Alhough onsuers budges are igher during onraions priing ay beoe even less iporan in relaive ers opared o epansions. Reduing he risk of buying a wrong produ is ore han ever a doinan onern in unerain ies and onsuers will onsequenly engage in even ore profound inforaion gahering and deision aking in whih prie will reeive less weigh relaive o ore funional aspes of he produ. An iporan reaining quesion however is how hese findings an be reoniled wih observaions ha opanies spending relaively ore on adverising during eonoi downurns have beer finanial perforane (Frankenberger & Graha 003; Srinivasan e al. 005; Deleersnyder e al. 009; Srinivasan and Lilien 009). Shifing budges fro adverising o prie reduions appears a reoended aial deision o inrease sales in he shor run. Long run effes however are no alered by he general eonoi ondiions. Consequenly a he sraegi level based on long run raios relaive budge alloaion should no be odified. Copanies saying loser o hese long run raios by no uing bak on relaive adverising ependiures ay hene show beer finanial perforane as sok pries are hypohesized o inorporae all long run perforane inforaion of he opany an effe whih ay be enhaned by sronger deviaions by opeing opanies fro heir opial relaive alloaion. Cuing bak oo uh on adverising ay daage he brand in he long run an effe whih an be eaerbaed by a lowering prie iage aong usoers when spending oo uh on prie reduions. In addiion as adverising effeiveness as suh does no hange over he business yle era invesens in adverising an be epeed o inrease he opany s resuls. Managers should onsequenly deide o wha een hey onsider arkeing invesens shor run aial eans versus long run sraegi invesens. In he laer ase peranen evaluaion and adjusen of he relaive alloaion of eans is no needed. If on he oher hand shor run sales gains are he arge hen a good undersanding of he general eonoi siuaion in obinaion wih hanges in relaive alloaion beoes warraned. 4

26 Direions for fuure researh In his work we analyzed adverising and prie elasiiies for a wide se of produs and aegories. We hereby foused on he 5 os iporan branded produs per aegory provided ha hey were on he arke for a leas 95% of he ie. As suh we ould epand our daase in four ways: (i) allow for saller brands (ii) allow for privae labels (iii) invesigae less aure aegories and (iv) eaine durables. Firs we ould enlarge our daase by also inluding saller brands in our analyses. However in order o over uliple business yles and no o base our findings on he arifas of jus one yle brands have o be on he arke long enough. As saller brands ay have ore diffiulies in oplying wih his ondiion we oped o fous ourselves o he op 5. Furher researh in his direion hene appears warraned. Seond we only foused on branded produs. Eaining o wha een arkeing i effeiveness varies over he business yle for privae labels akes up an ineresing avenue for fuure researh espeially given heir rearkable and persisen arke share gains during onraions (Laey e al. 007). Third our analyses are based on aure CPG aegories. Suh produs are haraerized by very sall adverising elasiiies (e.g. Sehuraan and Tellis 99). Less aure aegories on he oher hand an be epeed o show sronger adverising sensiiviy. In addiion his sensiiviy ay also vary ore wih he overall eonoi senien. Fuure researh ould hene inlude suh produs. Finally he produs in our daase are ainly every day neessiies. Purhases anno really be posponed unil he eonoy reovers. This on he oher hand is no he ase for durables. Consuers an and do wai unil he eonoi ondiions iprove and he unerainy diinishes (Deleersnyder e al. 004). This ould resul in even sronger business yle effes on arkeing i effeiveness. A deeper invesigaion ino his issue is hene alled for. 5

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