Wednesday, September 18, 2013

How Competitive Marketing Expenditures Influence the Growth of Markets

XIANG Yi, SOBERMAN David, GATIGNON Hubert
Read the working paper
INSEAD Working Paper 2013/96/MKT

Our objective is to empirically assess how competitive marketing effort and market growth, in terms of sales volume, interact. Researchers are acutely aware of the relationship between marketing expenditures and market growth yet this relationship has not been formally tested nor has the possibility of changes in the dynamics of this relationship over the course of market evolution been considered. Using a set of data on the sales and spending of 3 pharmaceutical categories across 7 countries, we analyze this relationship over the evolution of these categories from the introductory stage of the product life cycle to the maturity stage. An econometric hierarchical linear model is developed to represent the nature of the data. We find strong evidence that the breadth of marketing spending moderates the relationship between marketing spending and sales growth and that it changes over the course of the category life cycle. In particular, higher breadth in marketing expenditures when the market has few competitors arrest market growth whereas higher breadth when the market has many competitors fuels market growth. A further insight provided by the analysis shows that, beyond market share effects, the “cancelling out” of marketing spending increases as a category matures and this weakens the relationship between marketing spending and market growth.