Building Brands - 1

Building Brands
Berk M. Ataman, Carl F. Mela and Harald van Heerde

May 12, 2007
Collaborative & Multidisciplinary Research Conference
Building Brands - 2

Building Brands - 4
New Products are Vital
Overview Model Data Results Implications Summary
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2005 IRI New Product Pacesetters study shows:
$30 MM average cost of new product launch
Yet of all products achieve < $7.5 MM
But Risky
Overview Model Data Results Implications Summary
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Research Goal
What strategies lead to successful brand roll-outs?
Growth rate
Market potential
Integrated view across entire mix
Which of 4 Ps matters most?
Controls for strategy
Distribution penetration dominates all strategies combined!
Overview Model Data Results Implications Summary
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Research Goal
0 20 40 60 80 100 120 140 160 180 200
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Market Size Brand A
Market Size Brand B
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Overview Model Data Results Implications Summary
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Research Goal
Overview Model Data Results Implications Summary
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General Approach
A repeat purchase diffusion model
Lilien, Rao and Kalish (1981)
Rao and Yamada (1988)
Hahn et al (1994)
where rate of growth and level of market
potential are linked to long-term marketing
strategy
cast in a Dynamic Bayesian setting.
Overview Model Data Results Implications Summary
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General Approach
1. Short-term sales vary about long-term diffusion rate
2. Diffusion is trial and repeat processes
3. Diffusion rate driven by strategy
Many paths and reasons for growth
4. Endogeneity in marketing mix
Omitted factors affect price response estimates
5. Role of past performance
Success leads to spend
Spend leads to success
6. Competitive effects
Overview Model Data Results Implications Summary
Sales Model
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General Approach
1. Short-term sales vary about long-term diffusion rate
2. Diffusion is trial and repeat processes
3. Diffusion rate driven by strategy
Many paths and reasons for growth
4. Endogeneity in marketing mix
Omitted factors affect price response estimates
5. Role of past performance
Success leads to spend
Spend leads to success
6. Competitive effects
Overview Model Data Results Implications Summary
Diffusion Model
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General Approach
1. Short-term sales vary about long-term diffusion rate
2. Diffusion is trial and repeat processes
3. Diffusion rate driven by strategy
Many paths and reasons for growth
4. Endogeneity in marketing mix
Omitted factors affect price response estimates
5. Role of past performance
Success leads to spend
Spend leads to success
6. Competitive effects
Overview Model Data Results Implications Summary
Mix Model
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Modeling Approach:
Short-term Sales Model
1. Short-term fluctuations and
long-term diffusion

t t t t
v X Sales +
'
+ = | o
Short-term
Effects
Long-term Diffusion
(Baseline Sales Growth)
t = week
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Sales
Baseline
Fluctuations
Overview Model Data Results Implications Summary
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Modeling Approach:
Long-term Diffusion Model
2. Trial and repeat purchases
( )
t t t t
w + + =
1 1
o o o o
Baseline Sales

Repeat Rate

Trial Rate
Market
Potential
Lagged Baseline Sales
Overview Model Data Results Implications Summary
Diffusion of Innovation
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Modeling Approach:
Long-term Diffusion Model
3. Diffusion rate driven by strategy
( )
t t t t
w + + =
1 1
o o o o
Growth Rate

t t
Z
'

Market Potential

t t
Z
'

Z are the marketing mix variables
Overview Model Data Results Implications Summary
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Estimation
Estimation
DLM updating within Gibbs
MH step for non-linear transfer function parameters
Priors
Normal priors on all parameters
Sales and marketing mix errors are correlated, Inverse
Wishart on V
Evolution errors uncorrelated, Inverse Gamma on W

Overview Model Data Results Implications Summary
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Data
IRI (France)
5 years SKU-level data in France
25 categories
National sample of (560) stores
TNS Media Intelligence
Monthly Advertising Expenditures
Data aggregated across chains to national level
Overview Model Data Results Implications Summary
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Data (Continued)
225 new national brand introductions
22 categories
15% of brands fail
Min 104 weeks, Max 264 weeks

Overview Model Data Results Implications Summary
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Sales Volume
Regular Price
Advertising = Advertising Expenditure
Discounting = Percent Discount
Feature, Display, and In-store Communication
Line Length = Number of SKUs
Distribution Breadth = ACV weighted number of stores
Distribution Depth = Share of SKUs

Variables are standardized within brands
Variables
Overview Model Data Results Implications Summary
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Summary of Expectations
Variable Predicted Effect
Growth Market Potential
Advertising Expenditure + +
Regular Price - -
Discounting + +/-
Feature/Display + +
Breadth + +
Depth + +
Line Length + +
Overview Model Data Results Implications Summary
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Summary of Expectations
Which matters most?
As distribution and product disappear, sales go to
zero
Yet not clear which is more important
Advertising induces awareness and discounts trial
Not clear how important these relative effects are
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Sales Model Results

Sales = Long-term baseline + short-term
Correlation between actual and predicted weekly
sales is .97
Short term effect of discounting and
feature/display on sales is positive

Overview Model Data Results Implications Summary
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Diffusion Model Results
Marketing Activity Growth Market Potential
Constant .10

.11

Advertising .01 * .02
*
Regular Price -.01

.10

Discounting .01

-.02
*
Feature and Display -.01

.29

Distribution Breadth .02

.77

Distribution Depth -.00

.11

Line Length .01

.11

* Crosses zero at 93
rd
percentile.
Overview Model Data Results Implications Summary
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32%
18%
15%
14%
10%
8%
3%
54%
1%
7%
8%
20%
2%
8%
Distribution
Breadth
Discounting Regular Price Line Length Feature/Display Advertising Distribution Depth
Growth Market Potential
Diffusion Model Results
Overview Model Data Results Implications Summary
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32%
18%
15%
14%
10%
8%
3%
54%
1%
7%
8%
20%
2%
8%
Distribution
Breadth
Discounting Regular Price Line Length Feature/Display Advertising Distribution Depth
Growth Market Potential
Distribution breadth is the
single most important
marketing mix instrument.
Diffusion Model Results
Overview Model Data Results Implications Summary
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32%
18%
15%
14%
10%
8%
3%
54%
1%
7%
8%
20%
2%
8%
Distribution
Breadth
Discounting Regular Price Line Length Feature/Display Advertising Distribution Depth
Growth Market Potential
The effect of distribution
on market potential exceeds
all other strategies
combined.
Diffusion Model Results
Overview Model Data Results Implications Summary
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32%
18%
15%
14%
10%
8%
3%
54%
1%
7%
8%
20%
2%
8%
Distribution
Breadth
Discounting Regular Price Line Length Feature/Display Advertising Distribution Depth
Growth Market Potential
32%
18%
15%
14%
10%
8%
3%
54%
1%
7%
8%
20%
2%
8%
Distribution
Breadth
Discounting Regular Price Line Length Feature/Display Advertising Distribution Depth
Growth Market Potential
Discounting has
the second largest
impact on growth.
Feature/Display has the
second largest impact
on market potential.
Diffusion Model Results
Overview Model Data Results Implications Summary
Building Brands - 34
Long-term Marketing Mix Elasticities
Cumulative % revenue impact of 10% increase in:
Mean Std. Dev. Minimum Maximum
Advertising Spending
.24 .26 .01 1.02
Regular Price
-7.09 5.34 -39.83 -.07
Distribution Breadth
8.19 4.99 .42 30.21
Line Length
2.35 1.85 .16 10.60
Distribution Depth
2.95 2.14 .16 15.82
Discount Depth
-.14 .84 -12.56 -.00
Feature/Display
1.74 1.54 .09 11.06
Overview Model Data Results Implications Summary
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Marginal Profit Analysis
0 0 0
C R (MM) RM) (1 - - =
0 0 1
C ) 10 . 1 ( R ) 1 ( (MM) RM) (1 - + - A + - - =
10% permanent increase in marketing support
Base
Profit
Retailer
Margin
Manufacturer
Margin

Revenue
Cost of
Strategy
Cumulative Revenue Impact
Overview Model Data Results Implications Summary
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Marginal Profit Analysis
Mix Element 3*A
Distribution Breadth 24%
Distribution Depth 9%
Line length 7%
Feature/Display 5%
Advertising .7%
Overview Model Data Results Implications Summary
If breadths cost as % of revenue < 24%, spend more on distribution.
Assn: Retail Margin = 25%, Manufacturer Margin = 40%.

H
1
> H
0
implies costs as % of sales < 3*A

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Strategic Launch Options
Weeks Weeks
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Pricing Advertising
Product Line
Distribution
Penetration
Pricing
Price
Skimming S
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Constant
Advertising
Decreasing
Advertising
National
Launch
Phased
Roll-out
Simultaneous
Line Entry
Phased
Line Entry
Overview Model Data Results Implications Summary
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Main Effects Sales Growth
National vs. Phased Roll-out 48.1% 31
Simultaneous vs. Phased Line Entry 6.9% 7
Constant vs. Decreasing Advertising 2.1% <1
Penetration vs. Skimming 2.5% 9
Strategic Launch Options
Overview Model Data Results Implications Summary
Sales effect: difference in cumulative sales
Growth effect: difference in time to reach 90% of
maximum sales
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Strategic Launch Options
National launch interacts with
Low price to enhance market potential
Broader product line and decreasing advertising
to facilitate growth

Key take away: broad distribution enhances
efficacy of marketing
Overview Model Data Results Implications Summary
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Long-standing question in marketing: Why
some brands fail and some succeed?
Link sales outcomes of 225 new brands to
marketing strategy that span the entire
marketing mix
Bayesian DLM of repeat purchase diffusion
Conclusions
Overview Model Data Results Implications Summary
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Distribution is imperative
Exceeds effects of all other instruments
Interacts with other strategies to enhance their
efficacy
Dual role of discounts
Faster growth, lower market potential in the long-run
Breakeven thresholds are low for distribution and
product line
Yet past emphasis is on ads and deals!
Conclusions
Overview Model Data Results Implications Summary
Thanks for your interest!!