Accenture Interactive – Point of View SeriesPrecision Marketing AnalyticsWorking with time-varying parameters
Precision Marketing AnalyticsWorking with time-varying parametersMeasuring the impact of marketing Until recently marketers relied heavily The techniques and benefits of TVP modeling on constant parameters regression (CPR) are well acknowledged by scholars andon sales has long been seen as modeling to understand the impact of analysts in various industries. For instance,an essential planning tool for marketing investments on sales. Ads were the National Institute of Commoditymarketers. Understanding the bought on long lead times, the analysis Promotion Research and Evaluation appliedreturn on marketing investment of data was on a six-month cycle or more, this approach to the New York City’s fluid(MROI) of one promotional activity and media plans were prepared on an milk campaign data to understand the annual basis. However, in today’s always- impact of generic advertisement wearout.1over another, in terms of sales on, always-connected world, where ads are Analysts have also used TVP techniquesgenerated, helps allocate budget bought and sold in minutes, analysis is done effectively to study environmentaland shape campaigns. Intuitively, in real time and planning is an ongoing changes2 as well as stock movements.3marketers know that the activity, marketers are looking to understand In recent years, there has been a great the effectiveness of individual marketing deal of interest in applying this approacheffectiveness of each marketing activities at a much more granular level and to better understand the effectiveness ofactivity in driving sales varies across multiple channels. Understanding the marketing activities and to make strategicwithin its execution timeframe. But impact of specific campaigns around back- investment decisions.4since measurement calculations are to-school week for example, or opening day Unlike the CPR technique, the TVP model of the holiday sales, provides opportunitiestypically averaged across the entire can capture the finer movements of actual for higher MROI. As such, marketers areperiod analyzed, they are unable to starting to use more advanced econometric sales and determine the extent to whichgive strategic insights at specific modeling techniques which involve time- each marketing activity contributed to increased sales in a specific timeframe—daily,points in time. To overcome these varying parameters (TVP). weekly, monthly or a longer duration. Sincelimitations, marketers are exploring this approach reflects the actual responsealternative approaches to MROI. of consumers to marketing activities at a granular level, companies can use the data for making accurate investment decisions which may generate a higher return than would have been possible otherwise. 1 Prasad A. Naik, et al., “Planning Media Schedules 3 Ricardo. Montoya, et al., “Dynamic Marketing Mix in the Presence of Dynamic Advertising Quality,” Allocation for Long-Term Profitability,” December 16, Marketing Science,” Volume 17, Issue 3, 1998, 2007, 2012 Pages 214-235, 2012 4 Kalyan Raman, et al., “Optimal Resource Allocation 2 Jari Hänninen and Ilppo Vuorinen, “Time-Varying with Time-varying Marketing Effectiveness, Margins Parameter Analysis of the Baltic Sea Freshwater and Costs,” Journal of Interactive Marketing, Volume Runoffs,” June 29, 2010 Environmental Modeling & 26, Issue 1, February 2012, Pages 43-52, accessed Assessment Volume 16, Issue 1, February 2011, Pages February 4, 2013 53-60, accessed February 4, 2013
The ripple effectAt a time when chief marketing officers(CMOs) are under pressure to justify MROI,the TVP model helps increase accountabilityand drive marketing spend to higher levelsof incremental value per dollar invested.This approach ensures precision of dataand greater transparency in measuring theeffectiveness of marketing initiatives indriving sales across media channels—keyinformation that the finance departmentrequires for business planning. In fact, asother departments become aware of theincreased insight that more granular databrings to investment decisions, the rippleeffects of this approach are likely to befelt throughout the company.
Time-varying Parameters— A working exampleTo better understand the hidden dimensions and multiple benefitsof TVP modeling, it is helpful to take an example: SuperiorBuy—afictitious FMCG company with more than 1500 stores and 50Designated Market Areas (DMAs).Assume that the marketing department Going beyond consistent baselineat SuperiorBuy ran a series of marketing Available studies show that both approachescampaigns for two years across a number of are able to capture a company’s baselineoffline and online media channels. At the end sales (that is, loyal sales) accurately.of the campaign, the CMO at SuperiorBuy In addition, the CPR modeling approachwanted to quantify the effectiveness of its provides an acceptable estimate of themarketing activities across media channels weekly average sales attributed to marketingon a weekly basis over the two-year period. activities at a regional or national level.Based on the insights gained, he wanted The TVP modeling approach, however, goes ato plan the future marketing activities and step further and provides precise estimatesallocate appropriate budget to various media of the effectiveness of marketing activitieschannels. Which approach should the CMO across media channels in driving sales atuse to achieve his objective—TVP or CPR? a local level on a week by week basis.DefinitionsConstant Parameters Regression (CPR) model.A statistical (regression) model which provides advertising effectivenessestimates under the assumption that effectiveness is constant over time.Time-varying Parameters (TVP) model.A statistical (regression) model where multiple instances of advertisingeffectiveness (i.e. regression coefficients) can be defined over time.
Calibrating effectiveness of Figure 1a: SuperiorBuy actual sales over two year period showing Circular contribution (yellow area) to sales—CPR Approachmarketing activities in driving salesAs SuperiorBuy has a large number of storesacross multiple markets with differentlocal sales patterns, it is important that theCMO gain insight into the effectiveness ofmarketing activities across media channels Salesat a granular, rather than regional or 1 2national levels. As revealed in Figures 1aand 1b, a comparative analysis shows thatin such instances, the TVP model is moreappropriate than the CPR technique.Average versus actual MonthsAs reflected in Figures 1a and 1b, actualsales (white dotted line) showed a dramaticdrop on a number of occasions, for example Figure 1b: SuperiorBuy actual sales over two year period showing Circular contributionafter the Holiday Sales or Spring break, (yellow area) to sales—TVP Approachwhen SuperiorBuy stopped investing in oneof its key promotional activities, Circulars.The CPR modeling approach is unable tocapture the dip in sales (Figure 1a—1); onthe contrary, it gives the impression that SalesCirculars continued to contribute the most 1 2to sales. This is because the CPR modelprovides an estimate of sales activityby averaging results across the twoyear period, thereby smoothing out anysubstantial change in sales at a local level.By providing skewed estimates, the CPR Monthstechnique masks the true relationshipbetween marketing activities and both Actual salesweekly and annual sales. Sales attributed to circularsBy contrast, the TVP modeling approachreveals that when SuperiorBuy stopped S ales attributed to other marketing activitiesinvesting in Circulars, sales from thismedia driver came to a complete stop(Figure 1b—1). It also reflects thatinvestment in other marketing activities(orange area) continued to contribute tosales but by a much smaller proportionthan before. This type of additional insightcomes from the ability of the TVP modelto quantify uplifts and dips on a week byweek basis.
Media Driver Sensitivity Sales Figure 2: Long term sales quantified by CPR and TVP modelingWhen SuperiorBuy invested in several 4,000media drivers, leading to a boost in actualsales, for example, before the Holidays, Long term 3,500the CPR modeling approach reveals that average salesCirculars contributed only marginally to contributions TVPsales (Figure 1a-2). In addition, investment in 3,000other media channels appeared to continue CPRto drive sales in a fairly constant manner. 2,500By contrast, the TVP modeling approachreveals that Circulars helped boost overall 2,000sales very significantly, and that investmentin other media channels added to the 1,500spike in sales (Figure 1b-2). With a focuson granularity and being adaptive to the 1,000movement of local sales, the TVP modelgives the CMO at SuperiorBuy precise results.Furthermore, since the TVP model analyzes 500available data and also identifies gaps inthat data, it mirrors the real situation.The added value offered by TVP modeling over 8 16 24 32 40 48 56the CPR technique results from the fact that Investment (1000’s)the projection of weekly effectiveness ontoannual sales is closer to the long term averageeffectiveness (Figure 2). By gaining insightinto the effectiveness of marketing activitieson sales at a local level per media driver ona weekly basis, the CMO at SuperiorBuy canmake intelligent decisions about budgetallocation for the subsequent year. Maximizing the impact of When should the promotional activities terms of marketing activities across media begin in each marketing activity and how channels that proved more effective in future marketing activities long should it stay active? driving sales (or not) can give marketing The analysis of historical sales data using professionals invaluable insights for the each approach has a direct impact on future These questions are being asked by most future. This is exactly the promise of the decisions about marketing campaigns. marketing organizations aiming to reach TVP approach; it can guide CMOs and Should the marketing organization invest consumers across a range of media marketers to invest in a judicious mix in the same media drivers in the coming channels and wanting to measure the of activities based on those activities’ year or not? What is the most effective effectiveness of each promotional activity. past effectiveness in driving sales. mix of media drivers? An accurate analysis of historical data in
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