Brand performance volatility from marketing spending

Abstract

© Copyright 2016, INFORMS. Although volatile marketing spending, as opposed to even-level spending, may improve a brand's financial performance, it can also increase the volatility of performance, which is not a desirable outcome. This article analyzes how revenue and cash-flow volatility are influenced by own and competitive marketing spending volatility, by the level of marketing spending, by the responsiveness to own marketing spending, and by competitive response. From market response theory, we derive propositions about the influence of these variables on revenue and cash-flow volatility. In addition, we extend the Dorfman-Steiner theorem to derive the optimal level and volatility of expenditures if volatility effects are taken into account. Based on a large sample of 99 pharmaceutical brands in four clinical categories and four European countries, we test for the empirical relevance of the propositions and assess the magnitude of the different sources of marketing-induced performance volatility. We find broad support for the predicted volatility effects. Volatility elasticities are significant and may be as large as 1.10 for cash-flow variance with respect to marketing responsiveness. The findings imply that common volatility-increasing marketing practices such as price promotions or volatile advertising plans may be effective at the top line, but they could turn out to be ineffective after all costs are taken into account. Optimal marketing volatility needs to trade off sales effectiveness and extra costs resulting from marketing volatility