Dominique M. Hanssens

Modeling Customer Lifetime Value

As modern economies become predominantly service-based, companies increasingly derive revenue from the creation and sustenance of long-term relationships with their customers. In such an environment, marketing serves the purpose of maximizing customer lifetime value (CLV) and customer equity, which is the sum of the lifetime values of the company’s customers. This article reviews a number of implementable CLV models that are useful for market segmentation and the allocation of marketing resources for acquisition, retention, and cross-selling. The authors review several empirical insights that were obtained from these models and conclude with an agenda of areas that are in need of further research.

New Products, Sales Promotions, and Firm Value:The Case of the Automobile Industry

Year after year, managers strive to improve financial performance and firm value through marketing actions such as new product introductions and promotional incentives. This study investigates the short- and long-term impact of such marketing actions on financial metrics, including top-line, bottom-line, and stock market performance. The authors apply multivariate time-series models to the automobile industry, in which both new product introductions and promotional incentives are considered important performance drivers. Notably, whereas both marketing actions increase top-line firm performance, their long-term effects strongly differ for the bottom line. First, new product introductions increase long-term financial performance and firm value, but promotions do not. Second, investor reaction to new product introduction grows over time, indicating that useful information unfolds in the first two months after product launch. Third, product entry in a new market yields the highest top-line, bottom-line, and stock market benefits. Managers may use these results to justify new product efforts and to weigh short- and long-term consequences of promotional incentives.

Marketing and Firm Value: Metrics, Methods, Findings, and Future Directions

The marketing profession is being challenged to assess and communicate the value created by its actions on shareholder value. These demands create a need to translate marketing resource allocations and their performance consequences into financial and firm value effects. The objective of this paper is to integrate the existing knowledge on the impact of marketing on firm value. We first frame the important research questions on marketing and firm value and review the important investor response metrics and relevant analytical models, as they relate to marketing. We next summarize the empirical findings to date on how marketing creates shareholder value, including the impact of brand equity, customer equity, customer satisfaction, R&D, product quality and specific marketing-mix actions. In addition we review emerging findings on biases in investor response to marketing actions. We conclude by formulating an agenda for future research challenges in this emerging area.

The Long-Term Effects of Price Promotions on Category Incidence, Brand Choice, and Purchase Quantity

To what extent do price promotions have a long-term effect on the components of brand sales, namely, category incidence, brand choice, and purchase quantity? The authors answer this question by using persistence modeling on weekly sales data of a perishable and a storable product derived from a scanner panel. Their analysis reveals, first, that permanent promotion effects are virtually absent for each sales component. Next, the authors develop and apply an impulse response approach to estimate the promotional adjustment period and the total dynamic effects of a price promotion. Specifically, they calculate the long-term equivalent of Guptas (1988) 14/84/2 breakdown of promotional effects. Because of positive adjustment effects for incidence but negative adjustment effects for choice, the authors find a reversal of the importance of category incidence and brand choice: 66/11/23 for the storable product and 58/39/3 for the perishable product. The authors discuss the implications of the findings and suggest some areas for further research.

Do Promotions Benefit Manufacturers, Retailers, or Both?

Do price promotions generate additional revenue and for whom? Which brand, category, and market conditions influence promotional benefits and their allocation across manufacturers and retailers? To answer these questions, we conduct a large-scale econometric investigation of the effects of price promotions on manufacturer revenues, retailer revenues, and total profits (margins).A first major finding is that a price promotion typically does not have permanent monetary effects for either party. Second, price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Moreover, retailer category margins are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer. Third, our results indicate that manufacturer revenue elasticities are higher for promotions of small-share brands, for frequently promoted brands and for national brands in impulse product categories with a low degree of brand proliferation and low private-label shares. Retailer revenue elasticities are higher for brands with frequent and shallow promotions, for impulse products, and in categories with a low degree of brand proliferation. Finally, retailer margin elasticities are higher for promotions of small-share brands and for brands with infrequent and shallow promotions. We discuss the managerial implications of our results for both manufacturers and retailers.

The Direct and Indirect Effects of Advertising Spending on Firm Value

Marketing decision makers are increasingly aware of the importance of shareholder value maximization, which calls for an evaluation of the long-term effects of their actions on product-market response and investor response. However, the marketing literature to date has focused on the sales or profit response of marketing actions, and the goals of marketing have traditionally been formulated from a customer perspective. Recently, there have been a few studies of the long-term investor response to marketing actions. The current research investigates one important aspect of this impact, the long-term relationship between advertising spending and market capitalization. The authors hypothesize that advertising can have a direct effect on valuation (i.e., an effect beyond its indirect effect through sales revenue and profit response). The empirical results across two industries provide support for the hypothesis that advertising spending has a positive, long-term impact on own firms’ market capitalization and may have a negative impact on the valuation of a competitor of comparable size. The authors quantify the magnitude of this investor response effect for and discuss its implications for further research.

Alcohol Control Laws and the Consumption of Distilled Spirits and Beer

This article tests the social marketing effectiveness of alcohol control laws designed to reduce the consumption of alcoholic beverages. The study uses state-level historical data to estimate the demand for distilled spirits and beer using economic, sociodemographic, and control-law explanatory variables. Spirits and beer consumption are found to react differently to changes in economic, sociodemographic, and regulatory variables. These differences suggest a consumer and product segment-based approach to alcohol control laws or social marketing that emphasizes measures directed at youths for beer and at price for spirits.

Time-series models in marketing:: Past, present and future

Time-series methods have been available to explain and forecast the behavior of longitudinal variables for several decades. We first discuss why, at first, these methods received relatively little attention from marketing model builders and users. We then show how a number of obstacles to their more widespread use have recently been attenuated. Finally, we identify four developments that may significantly affect the future use of time-series techniques in marketing: the ever-increasing size of marketing data sets, the rate of change in the market environment, a growing interest in exploring the finance-marketing interface, and the emergence of Internet data sources. q 2000 Elsevier Science B.V. All rights reserved.

Customer Equity: Measurement, Management and Research Opportunities

Despite the recent academic interest in the study of customer equity (CE henceforth), a comprehensive discussion of the prevailing research issues has not been provided. There is a shift in the interest of managers and researchers from a traditional focus on product management to a more recent focus on customer relationship management (CRM). We believe that research on CE could provide the necessary tools to link CRM to long-term financial performance. In this paper, we (a) discuss the academic and strategic importance of CE, (b) provide an extensive literature review, and (c) prioritize future research. We argue that there are two major agendas for future research in CE. The first is to provide better measures (e.g. the measurement of customer lifetime value), and the second is to identify the strategies that lead to CE maximization. We emphasize modeling approaches that have been used or could be used to tackle the suggested research questions. A special focus is given to statistical models that are capable of incorporating long-run dynamics.

Movie Advertising and the Stock Market Valuation of Studios: A Case of “Great Expectations?”

Product innovation is the key revenue driver in the motion picture industry. Because major studios typically launch fewer than 20 movies per year, the financial performance of a single release can have a major effect on the studios profitability. In this paper we study how single movie releases impact the investor valuation of the studio. We analyze the change in postlaunch stock price and predict the direction and magnitude of excess returns based on the revenue expectation built up for a movie release. That expectation is set, in part, by media support; i.e., highly advertised movies are expected to draw larger audiences than others. By using an event-study methodology, we isolate the impact of a movie launch on studio stock price and track the determinants of that change. We examine a comprehensive data set comprising over 300 movies released by the largest studios. Our results indicate a clear interaction between the marketing support received by a movie and the direction and magnitude of its excess stock return post launch. Movies with above average prelaunch advertising have lower postlaunch stock returns than films with below average advertising. Our findings also suggest that movies that are hits at the box office may result in a lowering of stock price if they had high media support because of high performance expectations built up prior to launch. Thus prelaunch advertising plays a dual role of informing consumers about a movies arrival as well as helping investors form expectations about the studios profit performance.