Innovator Article

Wise Companies Save for a Rainy Day
Marketing Science, 2011

Marketing managers and their companies are better served by spending less on building brand loyalty up front and maintaining a reserve for advertising during a post-crisis period. Further, ad spending after a crisis is more effective in building brand interest than before a crisis.

That’s the recommendation of Professor Prasad Naik, Assistant Professor Olivier Rubel and Professor Shuba Srinivasan from Boston University School of Management. Their paper, “Optimal Advertising When Envisioning a Product Harm Crisis,” published in Marketing Science (Nov.–Dec. 2011), analyzed how companies and marketing managers can prepare for a potential product harm crisis—and demonstrated that there is an optimal course of action for incorporating risk into the allocation of marketing resources.

The researchers developed a dynamic model of sales growth that assumes a crisis will occur at random times in the future. Their findings complement theoretical models recommending the best advertising budget decisions that incorporate crisis planning.

The bottom line: save for the rainy day. Using the 2000 Ford Explorer rollover problem as an example, the researchers show that Ford’s baseline sales dropped 65 percent immediately following the crisis, which cost the company $3.5 billion. Ad expenditures before the crisis were less effective in maintaining sales afterwards, when profits sank.

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