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RESEARCH NOTE

Allocation of budget on marketing efforts: an econometric approach in India

Mehir Kumar Baidya
Indian Institute of Social Welfare and Business Management, Kolkata, India, and

Allocation of budget on marketing 501

Received 12 December 2010 Revised 21 March 2011 Accepted 23 March 2011

Partha Basu
Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur, Kharagpur, India
Abstract
Purpose Budget allocation on individual marketing efforts is a complex issue for managers. The purpose of this paper is to estimate the elasticities of individual marketing efforts to allocate budget by taking into consideration two brands in India. Design/methodology/approach Historical data on physical sales and various marketing efforts (advertising, sales force, promotion, distribution and price) have been collected for two brands. Double-log regression model has been tted on data to estimate the elasticity of sales to each effort. Subsequently, the estimated elasticities have been used to allocate budget on the individual marketing efforts in question. Findings Various interesting results have been observed, such as the sales force claimed the highest amount of budget for both the brands. Further, managers of both the brands are under-spending on all the efforts except for advertising in the case of second brand. Practical implications The ndings will provide insight into allocation of budget on individual marketing efforts objectively instead of subjectively, which dominates in the eld of marketing. Originality/value This research captures the real-world situations (rather than small scale lab-studies or theoretical modeling) and will denitely add some value in marketing literature. Keywords India, Marketing strategy, Advertising, Prices, Demand, Elasticity, Budget, Allocation Paper type Research paper

Introduction Expenditures on marketing efforts have been increased signicantly from only 20 percent of total corporation costs 50 years ago to 50 percent today (Sheth and Sisodia, 2002). It is the marketing manager who deals with this huge amount of budgeted expenditures. On e of the responsibilities of manager is to ensure that the budgeted expenditures have been allocated rightly to right efforts to maximize sales. However, allocation of budget is a complex task for manager since it is not easy for him to isolate the effects of individual marketing efforts on sales or prots in constantly changing markets. In reality, most of the managers continue to be banged on their intuition, simple heuristic and decision rules for allocation of budget on various efforts. For instance, Lilien et al. (1992) mentioned that it is a common practice to use percentage-of-sales rule for allocating budget on advertising in real world.

Asia Pacic Journal of Marketing and Logistics Vol. 23 No. 4, 2011 pp. 501-512 q Emerald Group Publishing Limited 1355-5855 DOI 10.1108/13555851111165057

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In the opposite direction, manager may arrive at a budget of advertising based on the costs of various media needed to accomplish a marketing goal (Miller and Pazgal, 2007). In a study, Sinha and Zoltner (2001) reported that most of the companies typically constraint the ratio of their sales force costs as a percentage of total sales. It is a very common practice in pharmaceutical industry to set budget and allocate them to sales force on the basis of reach and frequency will be required for contacting physicians (Mantrala, 2006). These budget allocation methods are widely accepted, used and outcomes are also reasonable, moreover easy to implement but generally incomplete and sub-optimal from scientic point of view. This study is a modest attempt to assist manager for allocating budget rationally on individual marketing efforts by identifying the following two managerially relevant research questions: RQ1. What is the right proportion of a budget to have on each marketing effort (advertising, sales force, promotion and distribution) to maximize sales (in units)? RQ2. Is manager over-advertising, over-promoting, over-distributing and over-selling his brand? That is, the strategic objective is to uncover the hidden relationship between sales (in units) and different marketing efforts to answer the above research questions to make the budget allocation issues sophistically simple. Literature review While there is a large literature on demand function (between sales and various marketing efforts) estimation topic, this study is restricted to examining three approaches of particular importance to marketers. These are decision calculus approach, experiments approach and econometric modeling approach. Decision calculus approach In a seminal article, Little (1970) suggests decision calculus method to estimate demand function in which managerial judgment is used as input. This article is the pioneer of application of calculus in the eld of marketing. Since, Littles article, a series of studies applied calculus to estimate demand function for the purpose of budget allocation (Babin and Babin, 1996; Baker and Collier, 2005; Divakar et al., 2005; Hanna et al., 2005; Lwin and Williams, 2003; Mower and Mower, 1991; Natter et al., 2007; Sulin and Pavlou, 2002; Wierenga et al., 1999; Wilson and McDonald, 2001). Both the statistical models and managerial judgment might achieve same level of accuracy in estimation of demand independently, a combination of these two that is decision calculus approach will denitely do better (Blattberg and Hoch, 1990). In reality, this approach is only considered when a manager does not have historical data and cannot afford to do experiments for data generation. Experiments approach When a manager does not have historical data but try to control some variables, which otherwise resist him for isolating the impact of each marketing effort, then experiments are needed to generate data. In a study, Lodish et al. (1995) divide a sample of households into test (exposed to advertisements) and control groups to assess the effectiveness

of various advertising creatives and budgets. In another study, Green and Krieger (2002) consider conjoint analysis to assess the relationships between product designs, consumers preferences and choices as well as to nd out the consumers price elasticity. Experiments are generally conducted to get idea about the variations in customer responses to different levels of marketing efforts by taking into consideration of test and control groups in different setting (Anderson and Simester, 2003, 2004; Banerjee, 2009; Campbell, 2008; Chow and Lien, 2010; Gaur and Fisher, 2005; Helm et al., 2009; Jain et al., 2010; Lilly, 2009; Meyers, 2010; Narayanan et al., 2007; Pornpitakpan, 2009; Sigurdsson et al., 2009; Turner, 2008; Veale and Questar, 2009; Wilbur, 2008; Yuvay, 2010). However, experimental studies tend to become very complex with an increasing number of marketing efforts if needed to accommodate in a single study. In reality, one or at the most two efforts are usually manipulated in a single study to calibrate the variation in customer responses with respect to experiment and control groups. Econometric approach Manager can consider an econometric approach when historical data are available and wants to estimate the impact of individual marketing efforts on demand empirically. In the consumer goods sector, availability of scanner data has opened the door to allocate marketing budget through this approach (Neelamiegham and Jain, 1999). In a study, DEsopo and Almquist (2007) apply an econometric model to identify the right efforts for allocating budget to maximize sales. A signicant number of studies devoted to build up models to capture the relationships between sales and different marketing efforts to allocate budget (Bass, 1996; Christen et al., 1997; Dube and Manchanda, 2005; Elberse and Eliashbery, 2003; Jofre-Bonet, 2000; Klapper, 2005; Krider et al., 2008; Mazzeo, 2006; Peter et al., 1996; Powers, 1991; Rossi et al., 1996; Rutkowski, 2006; Seetharaman et al., 2005; Vilcassim et al., 1999; Wind, 2008; Zhang et al., 2000). In another direction, many studies attempt to assess both the short- and long-term effects of various marketing efforts on sales through this econometric modeling approach (Hanssens, 1980; Lara and Ponzoa, 2008; Luo, 2009; Mesak and Callaway, 1995; Praxmarer and Gierl, 2009; Richardson, 2004; Susan, 2008; Uzelac and Sudarevic, 2006; Villanueva et al., 2007; Weber, 2002). The main advantage is that this econometric approach usually estimated the effectiveness of marketing efforts more accurately that other two approaches (as mentioned above). Moreover, this approach allows manager constantly learn and adapt from the past data. However, this approach is most effective when markets are more or less stationary. The researchers have collected historical data on sales, marketing efforts and price for two brands. At the same they are indeed interested in estimation of impact of different marketing efforts on sales empirically. In this context, it seems that the econometric modeling is most appropriate among all the three approaches as discussed above. Research design Statistical model, data sources and method of analyses have been presented in order in this section. Model A double-log regression model has been considered to estimate the relationship between sales (in units) and individual marketing efforts with price. The model is shown below:

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ln Y t ln a

4 X i1

hi ln X it hp ln X tp ln 1t

504

where Yt sales (in units) in tth quarter; Xit expenditures on the ith effort in tth quarter; Xtp price of brand in tth quarter; hi elasticity of sales to ith marketing effort; hp elasticity of sales (in units) with respect to price; a constant and 1t random error in tth quarter. This model assumes that the response of sales to each effort displays diminishing returns to increase in Xi, as evinced by the log function. This form of demand function has been chosen since it is easy to understand and satises the following conditions: . The effort, which does not exhibit quick impact on sales, it is tough to justify as a potential candidate for allocation of budget (Wise and Sirohi, 2005). . Many empirical studies support diminishing marginal return to individual marketing efforts (Basu and Batra, 1988; Simon and Arndt, 1980; White et al., 2001). . A parsimonious presentation of the relationship between sales and marketing efforts and easily applicable for solving budget allocation problem in marketing (Kluyver and Pessemier, 1986). The coefcients of this model are used to answer the rst research question by putting them in the following equations:

hi X i* P4 B 2 For point-based allocation 1 hi hi 2 sehi * X Li Pn B 2 For lower-limit-based allocation 1 hi 2 sehi hi sehi * X Ui Pn B 2 For upper-limit-based allocation 1 hi sehi
where X i* amounts that might be invested in ith effort; X * amounts that might be Li invested in the ith effort in the lower limit case; X * amounts that might be invested Ui in the ith in the upper limit case; hi elasticity of sales to ith marketing effort; se(hi) standard error of elasticity of ith marketing effort and B budget. Following inequality and equality conditions have been taken into consideration to conclude whether manager is under, over or optimally spending on individual marketing efforts (Lambin, 1970): . (hi/hp) , (ai/P ) in the case of under-spending on ith effort; . (hi/hp) . (ai/P ) in the case of over-spending on ith effort; and . (hi/hp) (ai/P ) in the case of optimally-spending on ith effort. where hi as dened earlier; hp as dened above; ai average per unit expenditures on ith effort over a period (2003-2008) and P average price of the brand over a period (2003-2008).

Data and methodology Time-series data on sales (in units), advertising, sales force, promotion, distribution and price in rupees have been collected from the internal sources (documents and records of two rms) for two brands. Quarterly data over a period of six-year (2003-2008) that is, the data le consists of 24 observations for each brand is available to analyze. It is to be noted that the researchers have collected data only for two brands since the managers of all other brands (available in the market, West Bengal, India) were not interested into share data on the ground of condentiality. Quarterly data on sales and marketing efforts (except sales force) have been given suitable adjustment for seasonality since they exhibit strong seasonal patterns in both the cases (Makridakis et al., 1998). The model (as mentioned earlier) has been tted on data to estimate parameters those are nothing but elasticities of sales to individual marketing efforts and price. Then, the estimated elasticities have been tted into default (point or interval estimates as the case may be) and allocate budget to individual marketing efforts accordingly. Moreover, the ratio (unit-cost on ith effort/price) has been compared to the ratio (elasticity of ith effort/elasticity of price) of respective efforts and on the basis of inequality and equality conditions (presented above), it has been identied whether manager was spending optimally on ith effort (FitzRoy, 1976). In the above-mentioned methodology, only the short-term effects of individual marketing efforts are captured. However, marketing efforts do not necessarily have only short-term effects. For instance, advertising may have both the short- and long-term effects and promotion may have only the short-term impact (Hanssens, 1980). Owing to small number of observations, the researchers do not attempt to incorporate the carry-over effect terms in the model. Results Results of regression analysis are presented in Table I for both the brands. All the elasticities sales to individual marketing efforts are found positive in both the cases. However, price has a negative relationship with sales as expected. To test whether the estimated elasticities are signicant, the following hypotheses (H1 and H2) have been formulated and tested: H1. Each effort would have a positive effect on sales. With four efforts, the research hypotheses would be as: H 0 : hi 0 against H a : hi . 0;
Predictor Advertising Sales force Promotion Distribution Price Keo-Karpin 0.750 1.250 0.052 0.623 20.900 SE 0.405 0.176 0.009 0.366 0.106 t 1.85 * * 7.10 * 5.25 * 1.70 * * 2 8.46 *

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i 1; . . . ; 4
Navratna 0.11 1.350 0.114 0.323 21.150 SE 0.065 0.530 0.067 0.188 0.300 t 1.81 * * 5.35 * 1.70 * * 1.71 * * 2 3.88 *

Notes: Signicant at: *p , 0.001 (one-tail); * *p , 0.05 (one-tail)

Table I. Elasticity of sales to marketing efforts and price for Keo-Karpin and Navratna

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H2. Price would have a negative inuence on physical sales. The research hypothesis would be as: H 0 : hp 0 against H a : hp , 0

506

Test statistics (Table I) suggest that all the hypotheses (H1 and H2) are conrmed in both the cases. Hence, all the efforts have signicant positive effects on sales for both the brands. However, these elasticities do not indicate any relative effects of individual marketing efforts on sales since they are unstandardized in nature. These elasticities have been utilized to allocate budget to individual marketing efforts in this work. Before jumping on any decision, the researchers want to make a point that the types of marketing objective to be carried on should be the basis of allocation of budget. Normally, there are three types of objective: (1) pessimistic, which is achievable at 90-99 percent times; (2) most likely that is achievable at 10-90 percent times; and (3) optimistic, which is achievable at 1-10 percent times. Hence, researchers attempt to device three types of allocation mix for a set of marketing efforts, one for each objective. As per the points-of-parity, lower limit-based allocation mix (LLBAM)-allocation of budget should be done on the basis of proportions of lower limit of elasticities of individual marketing efforts to accomplish pessimistic objective. Similarly, upper limit-based allocation mix (ULBAM)-budget allocation should be done as per the proportions of upper limit of elasticities of different marketing efforts to pursue optimistic one. Results are shown in Tables II and III for Keo-Karpin and Navratna, respectively. Results (Table II) indicate that the proportions of budget on advertising and distribution go up to accomplish objective from pessimistic to most likely and most
Basis LLBAM PEBAM ULBAM Advertising (%) 20.0 28.0 31.7 Sales force (%) 62.4 46.7 39.1 Promotion (%) Distribution (%)

Table II. Allocation mix of budget on marketing efforts for Keo-Karpin

02.5 15.1 02.0 23.3 01.7 28.4 Pn Notes: LLBAM lower limit-based allocation mix hi 2 sehi = 1 hi 2 sehi ; PEBAM P point estimate-based allocation mix hi = 4 hi ; ULBAM upper limit-based allocation mix 1 Pn hi sehi = 1 hi sehi

Basis LLBAM PEBAM ULBAM

Advertising (%) 03.8 06.1 07.3

Sales force (%) 82.3 70.0 64.7

Promotion (%)

Distribution (%)

Table III. Allocation mix of budget on marketing efforts for Navratna

03.5 10.4 06.9 17.0 07.3 20.7 Pn Notes: LLBAM lower limit-based allocation mix hi 2 sehi = 1 hi 2 sehi ; PEBAM P point estimate-based allocation mix hi = 4 hi ; ULBAM upper limit-based allocation mix 1 Pn hi sehi = 1 hi sehi

likely to optimistic in the case of Keo-Karpin. However, proportions of budget move in the opposite direction in the cases of sales force and promotion as it is seen in the cases of advertising and distribution for this brand. Results (Table III) reveal that allocation of proportions of budget move upward to accomplish objective from pessimistic to most likely and most likely to optimistic in the case rival brand. Now, it is the time to assess what amount of budget was allocated to ith effort earlier is optimal or not. In this context, ratio of unit cost to price is calculated for each effort over a period 2003-2008. Further, a ratio is calculated by dividing elasticity of ith effort by elasticity of price. Results are shown in Table IV for both the brands. An effort-wise comparison has been made between the unit-cost/price ratio and elasticity ratio (ith effort/price) in both the cases. It is revealed that the manager of Keo-Karpin seems to be under-spending on all efforts. However, the manager of the rival brand seems to be over-spending on advertising and under-spending on all other efforts. Discussion There is a signicant positive relationship exists between sales (in units) and advertising, sales force, promotion and distribution in both the cases. However, price has negative effect on sales as expected for both the brands. Results suggest that 1 percent increase in budget on sales force leading to the highest increase in sales among all the efforts in both the cases. Hence, allocation of budget should be done as per the expected contribution in sales of each marketing effort. In the case of pessimistic objective, LLBAM suggests that the amount of budget should be allocated to advertising is 20.0 percent of total budget. However, this amount of budget is 31.7 percent for this effort in the case of optimistic objective as suggested by ULBAM. Similar qualitative interpretations can be made for all other efforts in both the cases. Moreover, in past, both the managers seem to be under-spending on all efforts except for advertising in the case of second brand as shown by unit cost to price ratio and ratio of elasticity of ith effort to elasticity of price in both the cases. Conclusion This study is a modest attempt to solve the two main issues of budget allocation on different marketing efforts. Data have been collected for two brands and multivariate statistical analysis has been performed to answers both the research questions (as mentioned in introduction). Results suggest that all the marketing efforts have signicant positive effects on sales, which is the answer of the RQ1. As far as RQ2
Brand (1) Keo-Karpin Effort (2) Advertising Sales force Promotion Distribution Advertising Sales force Promotion Distribution Unit-cost price ratio (3) 0.091 0.017 0.017 0.142 0.122 0.015 0.004 0.230 Elasticity ratio (4) 0.833 1.380 0.051 0.690 0.105 1.175 0.093 0.284

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Navratna

Notes: Cost/price ratio (ai/P); elasticity ratio (hi/hP)

Table IV. Cost/price ratio and elasticity ratio (ith effort/price) for each effort

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is concerned, results reveal that both the managers seem to be under-spending on all the efforts except for advertising that too in the case of second brand. Findings have a number of business implications. Manager may allocate budget to individual marketing efforts more precisely in a changing market conditions. By doing so, manager is in a better position to justify his actions, which indeed yield more value to the rm and its shareholders. Further, ndings will assist manager to make allocation decisions based on fact instead of faith that is prevailing in the eld of marketing. Results will navigate manager in the right direction to allocate budget leading to improve overall return on marketing investment (Wise and Sirohi, 2005). This study suggests three allocation mixes, which in turn depend on the level of customet responses (low, medium and high) to individual marketing efforts that is a new concept in marketing. Moreover, this work accommodates a number of marketing efforts in a single model, which is not so common in the eld of marketing. This study does not accommodate the competitors actions (one was investing for growth, another was maintaining a minimum level of investment and a third was cutting investment in different marketing) in the model due to data constraint. No interaction terms between efforts (advertising, sales force, promotion and distribution) are added in the model due to small number of observations per effort. Neither the company-specic factors (size of the company, years in operation, etc.) nor the customer-specic variables (income, age, location, etc.) have taken into consideration in this work since data were not available. Further, ndings cannot be generalized for other brands in the same product category as well as for the brands in the other categories since data were collected only for two brands. This study will extend by considering both the short- and long-term effects of each marketing effort by collecting data for a longer period in future. Marketing efforts do interact in reality. One efforts effect on sales is a combination of its own and interaction effects with other efforts. This aspect will be taken care off by incorporating appropriate interaction terms in the model. Marketing activities may not only initiate to generate demand but also to enhance customer satisfaction in FMCG sector. A survey will be conducted to measure customer satisfaction index for giving adjustment for the purpose of allocation of budget on individual marketing efforts more precisely. Finally, it would be of great interest in expansion of this study from a two-brand based to a multi-brand one. By doing so, hopefully researchers would be in a better position to generalize the nding for all the brands in the hair-oil industry.
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