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How do we estimate the short-term and long-term impact of advertising on sales? How do we find out what is the optimal level of advertising in a particular market?
C3Research uses a sophisticated time series modeling approach to tease apart the short-term sales impulse as well as the long-term brand equity build up due to advertising. Optimal levels of advertising are modeled using competitive advertising data. Here is how the modeling works:
The model. We first examine the sales and advertising data to assess predictable trends. Next, we set up a vector auto regression model (a "fancy" version of regression in which multiple equations are linked). We primarily deal with three series: sales performance, marketing budget, and competitors' marketing budget. The model is set up in such a way that we can determine cause and effect in a time sequence. For example, advertising today leads to sales tomorrow. As sales go up, advertising spending goes up. In the model, we simulate "shocks" to derive short-term and long-term effects.
Business scenarios. The modeling approach helps us to determine four different business scenarios:
Business as usual: There are no long term effects of advertising. Sales grow as a response to advertising but revert back to original levels after the advertising is withdrawn.
Escalation: The competition in the market escalates due to increase in advertising by one company. Everyone suffers and the payout due to advertising is negative.
Hysteresis: The best possible scenario. Advertising has a long term effect. Sales grow due to advertising and persists at a higher level even after advertising is withdrawn or reduced.
Evolving: In some cases, such as with new product categories, the market and business practices are still evolving and it is not possible to make any long term predictions.
Optimal Spending. This modeling approach can be used to determine optimal levels of advertising required in each competitive market for obtaining both short-term results and long-term market build up.
Competitive Advertising. The modeling approach can assess the impact of competitive brand advertising on your sales and help identify your main competitor in each market. Market by market analysis of ad media spending and price promotions will permit you to target and track your direct competitors. You can optimize your advertising budget by spending more in markets where your direct competitors are bigger threats and reducing spending in markets which are more insular for your brand.
