Optimizing Ad Spend to Maximize Profits
Journal of Marketing Research, 2012
What is the optimal advertising budget and allocation that maximizes profits across multiple regions and over time? The chief marketing officer of a Fortune 500 company raised the question after she noticed that increasing her company’s advertising expenditures enhanced sales as expected, while profits diminished.
“She was incredulous,” said Assistant Professor Ashwin Aravindakshan who, along with Professor Prasad Naik and Kay Peters of the Center for Interactive Marketing and Media Management at the University of Muenster, was intrigued by the problem.
They joined forces and discovered that the firm’s managers were relying on the brand development index (BDI) to calculate the company’s market budget and advertising allocations. The BDI does not optimally allocate resources at the regional and national levels because it does not take into account the firm’s profit-maximizing aims.
According to Aravindakshan, the BDI only measures the sales strength of a brand and the method estimates are ad-hoc, and thus, not sufficient. “It provides no means of providing or estimating the total ad budget,” he said.
Aravindakshan, Naik and Peters developed an alternative model that accounts for both the spatial (how advertising in one region will impact sales in an adjacent region) and temporal (how advertising in one period will impact sales in future periods) effects of regional and national advertising on sales. With these estimates, a firm can simultaneously determine the profit-maximizing optimal advertising budget, regional and national allocations, and the optimal split between regional and national advertising.
The researchers’ new model enhanced profits by 5.07 percent over the BDI. Their article “Spatiotemporal Allocation of Advertising Budgets” appears in the Journal of Marketing Research (February 2012).