Allocating Marketing Resources

Companies spend billions of dollars every year on marketing 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 appropriate returns for the firm. In this chapter, we highlight a two-stage process for marketing resource allocation. 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, marketing researchers and practitioners have adopted various methods and approaches that explicitly or implicitly follow these two stages. We have categorized these approaches into a 3x3 matrix, which suggests three different approaches 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 these approaches and illustrate them through applications and case studies.