A Micro Modeling Approach To

Investigate The Advertising- Sales

Relationship
Introduction:
Purpose- To derive the model of advertising effects on the sales.
To develop more optimal advertising budgets.
Many lag models were used, none gave satisfactory results.
Advertisers focus on 2 aspects- i. % of buyers reached by an ad.
ii. Effect of an ad on future behavior of the buyer.
A micro model will be used to derive the aggregate sales relationship.
Topics in this presentation:
1. The Consumer Model
2. General form of consumer model equation
3. Special case of model
4. Evaluation of the model
5. Application and comparison the model
6. Conclusions
1.The Consumer Model
Assumption1:
1. Let q be the probability of the consumer to be exposed to any ad.
2. For total of n insertions, the probability of a consumer being exposed
to x ads is assumed to have a bernoullis distribution with probability
q:
[n!/x!(n-x)!]q
x
(1-q)
1-x
3. To account for the homogeneity of the population it is assumed to have
Beta-bernoullis distribution.
Assumption2:
1. Exponential decay of effectiveness function: p(t)=e
-(t-t
i
)
.(1)
2. Decay between t
1
and t
2
is : f(t) = qe
- t
.
3. After t
2
,(1-q) proportion of 1
st
group wont see the ad.
4. Therefore, f(t)= q(1-q)e
- t
+qe
- (t-t
2
)
for the second insertion
5. For t= 0,1,2,3.
q + q(1-q)e
-
+ q(1-q)
2
e
-2
+= q/[1-(1-q)e
-
]
6.For computing sales over an interval, we integrate:
For kth period of length ,
s(k)= c
1
+ c
2

k
(k-1)
f(t) dt(2)
Where c
1
and c
2
are constants.
7. This model assumes competitive environment is stable.
8. Therefore some error could be incorporated as competitive effects:
s(k)= c
1
+ c
2

k
(k-1)
f(t) dt +
k
2.General form of the consumer model
equation:
Where t
i
is the time of the most recent insertion and t
i-1
the time of the
insertion preceding it.
Assumption: Insertions occur at constant rate.
For n
k
insertions in any period k of time time interval between
insertions is:
k
= /n
k
.
Using (2) and (3) i.e. integrating, sales-advertising eq. becomes:
(3)
(4)
Where:
and
It is assumed that the insertions are equally spaced.
3.Special Case of the Model:
Assumption: q is very small.
The previously discussed model becomes:
where .(5)
Rewriting the equation(5) as :
Simplifying:
The variables, c
1
,

, X
k
,

and Y
k
can be obtained by obtaining .
4.Evaluation of the model:
In this section we will discuss:
i. Effect of advertising on sales.
ii. The carryover effect.
iii. Koycks Model
iv. The Bass-Clarke result
i. Effect of advertising on sales:
The effect of advertising on sales in non-linear:
1. Is not of the form: s
k
=ln(n
k
) or ln(s
k
)=ln(n
k
).
2. As increases s
k
declines at decreasing rate.
3. As q increases s
k
increases at decreasing rate.
ii. Carryover Effect:
Definition: Effect of present period advertising on next periods
sales divided by effect of present period advertising on present
period sales.
As alpha, q or n
k+1
increases, the carryover effect decreases.
Is not constant over time.
It is non-linear with the frequency n
k
.
One period carryover effect:
iii.Koycks Model:
Model:
S
k
=a + bA
k
+ S
k-1
Effect of the insertion pattern and carryover effect on .
Two cases: 1. When the insertions are random and 2. When the
insertions are at regular intervals.
is calculated using the linear model with q=0.1, c
1
=50,000,
c
2
=532,000 and =1, for random and regular insertions as:
Effect of time aggregation on the
model:
Marketers using this model found to increase with increased duration
of time.
Values of were calculated for monthly and quarterly data, following
result was found:
Monthly data acts as random insertions and the quarterly data as
regular insertions.
If we control insertion pattern we can control .
iv. Bass-Clarke Result:
This section is based on the observation made by Bass-Clarke and by
using the approximate form of the previously obtained linear model.
The Model used:
Results:
Effect decays with time and has maximum impact immediately after
the ad is seen.
The decay depends on the value of .
The results obtained in the above table requires low value of q.
The model is less sensitive to time aggregation.
5.Application and comparison of the
model:
The models are applied to the 3 yrs
advertising and sales data.
90% duration and the of the ad and variance
is calculated using the model, for the values
of alpha=1 and 1.5.
As compared to the Koyck model the derived
model has more variance and is less
sensitive to the time aggregation.
6.Conclusions:
1. A macro model was generated from the micro
model, using the assumptions on the reach and the
decay.
2. The micro and the aggregate models work on
different principles.
3. The model is non-linear and has diminishing
returns to the advertising.
4. Carryover effect depends on present and past
spending levels.
Thank You.