Allocating Marketing Resources

Companies spend billions of dollars on marketing every year because it is essential to organic growth. Given these large investments, marketing managers have the responsibility to optimally allocate resources and to demonstrate that their investments generate suitable returns for the firm.

In this chapter we highlight a two-stage process for making and justifying marketing allocation decisions. In stage one, a model of demand is estimated. This model empirically assesses the impact of marketing actions on consumer demand for a company's product. In stage two, estimates from the demand model are used as input in an optimization model that attempts to maximize profits. This stage takes into account costs as well as firm's objectives and constraints (e.g., minimum market share requirement).

Over the last several decades, various methods that follow these two stages, either implicitly or explicitly, have been developed. We categorize these techniques in a three-by-three matrix, which suggests three different methods for stage-one demand estimation (decision calculus, experiments, and econometric methods) and three different methods for stage-two economic impact analysis (descriptive, what-if, and formal optimization approach). We discuss pros and cons of each method and provide illustrations through applications and case studies.