Dynamic Marketing Budgeting for Platform Firms: Theory, Evidence and Application
Journal of Marketing Research, 2011
Few studies address the marketing budgeting problems of platform firms operating in two-sided markets with cross-market network effects, i.e., the demand from one customer group of the platform influences the demand from its other customer group. Yet such firms, e.g., media firms like newspapers whose customers are subscribers and advertisers, are prevalent in the marketplace and invest significantly in marketing.
To enable such firms to make effective marketing decisions, Professor Prasad Naik and co-authors Srihari Sridhar from Pennsylvania State University, and Murali Mantrala and Esther Thorson from the University of Missouri delineate the desired features of a platform firm’s marketing response model, specify a new response model, and validate it using market data from a local newspaper.
Results show that the firm faces reinforcing cross-market effects, its demand from both groups is impacted by marketing investments, and the model exhibits good forecasting capability. Then, the authors utilize the estimated response model to determine optimal marketing investments over a finite planning horizon and find that the firm should significantly increase its newsroom and sales force investments.
Based on this model-based recommendation, the firm’s management increased their newsroom budget by 18%. Further normative analysis sheds light on how cross-market and carryover effects alter classical one-sided marketing budgeting rules.