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This paper presents the results of studies for major industrial concerns
on the sales response to advertising. A simple model of the interaction
of advertising and sales is described that is consistent with the results of
controlled experiments performed on a large number of products and
several media. The model is based on three parameters: Sales Decay
Constant, Saturation Level, and Response Constant. It has proved useful
for analyses of advertising campaigns and for allocations of advertising
appropriations.
constant rate (X= 0.9 per year) up to the beginning of 1953, when an
article favorable to the product appeared in a popular magazine of wide
circulation. Sales increased by a factor of five within a month. This
level of sales, however, was not maintained, but began to decrease much
more quickly (X=4.7 per year) than the original rate until it reached a
new level, double that before the promotion. At this point, the Sales
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Decay Constant returned to the original value of 0.9. Eight months later,
the product was mentioned favorably in another popular magazine, and the
same phenomenon occurred. Clearly, we are dealing here with two classes
of customers: those who were induced to purchase after reading the mag-
azine articles, but who soon lost interest in the product; and the 'normal'
customers, who behaved much like the original customer population. Both
articles succeeded in raising the number of 'normal' customers.
Saturation Level
The concept of Saturation Level is illustrated by the sales history of
product D, Fig. 4. This product was promoted continuously for one year
by weekly newspaper advertisements beginning in July 1954. In the first
six months, sales rose 30 per cent and then leveled off, although the ad-
vertising campaign was continued for another six months. This additional
advertising may have helped to maintain sales at the new level, but this
effect cannot have been large, because the decay rate both before and after
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TEST*PERIOD I ITEST PERIOD 2
Fig. 5. Product E-sales history.
market that the particular campaign can capture. This Saturation Level
can often be raised further by other advertising media.
Response Constant
In addition to the Decay Constant and the Saturation Level, we need a
third parameter to describe the sales behavior of a product. We define the
Response Constant, r, as the sales generated per advertising dollar when
S=0. We note that the number of new customers who are potential
buyers decreases as sales approach saturation. When advertising is
directed indiscriminately to both customers and noncustomers, the ef-
fectiveness of each advertising dollar in obtaining new customers also
decreases as sales increase. In general, the sales generated per advertising
dollar, when sales are at a level S, is given by r(M-S)/M, where M is
the Saturation Level.
As an example, for product D the Saturation Level was $42,000 per
month (see Fig. 4). The advertising expenditure was $5,000 per month.
In 1954, before the start of the advertising campaign, monthly sales aver-
aged $29,000 or 70 per cent of the Saturation Level. The unsaturated
portion, or the percentage of the potential represented by noncustomers,
was 30 per cent. The new customers converted to the product as a result
of the July promotion increased sales by approximately $3000 per month.
The Response Constant was therefore r=($3000/mo)/(0.30X$5000)=
2/mo.
MEASUREMENT OF PARAMETERS
IN THE NEXT SECTION, we will present a model of the interaction of ad-
vertising and sales, based on the three parameters: Sales Decay Constant,
Saturation Level, and Response Constant. These parameters differ from
product to product and must therefore be determined separately for in-
dividual products. The Sales Decay Constant can be measured from the
sales data either before or after a promotion. The Saturation Level and
Response Constant can be determined from a detailed analysis of the sales
history, or when necessary, experimentally. We have found that test
promotions, when carefully designed with experimental controls anld on a
sufficiently large scale, give results that are both significant and repro-
ducible, though the degree of accuracy attainable is smaller than ordinarily
considered acceptable in many other fields of research. Product adver-
tising, when effective, shows results within days or at most weeks, so pro-
posed advertising programs can be thoroughly pretested. When as large a
market share as possible must be captured before competing products are
developed and marketed, it may be necessary to forego pretests. In such
cases, rough estimates of the three parameters can be made from a knowl-
edge of past performances of similar products. As the campaign progresses
and the estimates of the parameters are improved, the campaign can be
modified accordingly.
MATHEMATICAL MODEL
WE HAVE SEEN that the response of sales to a promotional campaign can be
described by three parameters: X, the exponential Sales Decay Constant,
M, the Saturation Level, and r, the Response Constant.
A mathematical model of sales response to advertising, based on these
parameters, is represented by:
dS/dt = r A (t) (M-S)/M-XS, (1)
where S is the rate of sales at time t, and A (t) is the rate of advertising ex-
penditure. This equation has the following interpretation: the increase
in the rate of sales, dS/dt, is proportional to the intensity of the advertising
effort, A, reaching the fraction of potential customers, (M-S)/M,
less the number of customers that are being lost, XS.
This model has been chosen because it describes in simple mathematical
terms our experimental observations. Undoubtedly the probability of
losing customers is decreased by advertising. Further experiments may
prove that r and M are altered by changes in market conditions, by com-
peting advertising, and by the introduction of new products. However,
every increase in complexity requires the introduction of one or more ad-
ditional parameters into equation (1). Since this model has been sufficient
to describe the observed phenomena to the degree of accuracy allowed by
the quality of our experimental data, there seems to be no reason at this
time to complicate the picture unnecessarily. As our knowledge of ad-
vertising increases, it should be possible to improve this model and to
develop more sophisticated theories.
From equation (1) we can derive several results that have proved useful
in the design and evaluation of advertising campaigns:
Steady-statesolution. We can determine the advertising effort required
to maintain sales at a steady predetermined level by setting dS/dt=O.
From equation (1), we then have A= (X/r) SM/(M-S). We see that
the closer sales are to the saturation level M, and the larger the ratio X/r,
the more expensive it is to maintain the required sales rate.
Solution of equation (1). For a constant rate, A, of advertising ex-
penditure, maintained for time T, the rate of sales is obtained by integra-
tion of equation (1):
I / M+X) t} +SO e-r(A /M+X) tj (t < T) (2)
S(t) =[M/(I + XM/rA)] 1- e(r
where So is the rate of sales at t =0, the start of the advertising campaign.
After advertising has stopped (t> T), sales decrease exponentially:
S(t) =S(T) e-X(tT). (t>T) (3)
M ___________________i______________________
T
TIME (t)
Advertising Pulse
Many advertising campaigns are short and very intense. To get an
expression for a single-pulse campaign of negligible duration we can in-
tegrate equation (1) to obtain
S(t)_=Meet-I(M _So) e(raIM+x)t (4)
immediate sales increase, multiplied by the mean life of the product, X-1.
Also, given a choice of several products, the advertising campaign will
generate the most sales for the product with the largest value of
(r/X) (M- So)/M.
ALLOCATION OF ADVERTISING BUDGET
WE HAVE DISCUSSED experimental results of sales response to advertising
and have described a simple mathematical model that adequately fits our
observations. Once the parameters are measured for individual products,
the problems of advertising budget size and of the allocation of the budget
among different products can be considered.
Advertising is a form of investment. Those products should be ad-
vertised that will result in a return on capital invested equal to or greater
than the returns from other possible investments, such as new equipment
and research.
As an example, let us consider the simple case of a family of products
that might be advertised by short, intense campaigns. We define the
following quantities:
ak= total cost of the proposedadvertisingcampaignfor productk.
Rk(t)=additionalsales resultingfrom the advertisingcampaign.
Ck(t) =rate of additionalexpendituresresultingfromthe advertisingcampaign.
These include (a) the cost of the advertisingcampaignitself, (b) the cost of
manufacturingand distributingthe additionalitems sold.
Ik =return on capital invested in advertisingproductk. For example,$100 at
time t1 is equivalentto $100 exp[Ik(t2-t1)] at time t2.
The sum total of expenditures incurred by the promotion of product k
discounted at the rate Ik from the start of the advertising campaign
(t=O) is
f Ck(t)e-kt dt
The additional sales resulting from the advertising campaign, also dis-
counted at the rate Ik, are
f Rk(t) e-It dt
In order to determine the rate of return on capital invested in the promo-
tion of product k, we equate expenditures and sales increases:
Under the assumption that production and distribution costs are pro-
portional to sales, we have