Estimating and Implementing: A Marketing Mix Model

Copyright 2014 Institute for Marketing Productivity - All rights reserved

You are approached by a digital video streaming subscription service company. This company sells monthly subscriptions to their service for $X a month, which is purchased exclusively at the company’s consumer website.

The company would like to know how to improve their spending allocations against TV GRPs, Digital Display, and Paid Search advertising, to improve weekly profit.

They have provided us with weekly subscription sales data for the last three years across eight geographic regions of the country, as well as their mix of television GRPs and total digital-display advertising impressions. The data set also includes the volume of paid search impressions, as well as the volume of website traffic. We also have an index on the adoption of technologies that enable users to best enjoy the digital video streaming service. This variable captures things like the market penetration of high-speed internet connection, tablets, internet TVs, and the like. Think of this variable as a growth index. We’ll call this trend variable “Installed Base” because this variable represents growth in the installed base of technology relevant to digital-video-streaming. You will also see some data on popcorn sales and fuel price.

3

Describe the Data

Time Series, Cross-sectional, Panel?

Is the data balanced?

4

Specify the Model

Partner UpHypothesize candidate models• Which variable(s) does the company control the

spend for?• Which variable(s) are less controllable• Which variable(s) do they have essentially little to

no control over?• Which relationships should I model? (How many

equations should we specify?)• Which variables should we include in each equation.• Functional form?• What sign do you hypothesize for each parameter

you specify and plan to estimate?

5

Estimate the modelsUse excel, or your favorite statistical analysis software, and estimate your models with the provided data

Summarize the results in an organized manner, focusing on the models that fit your hypotheses and fit the data best.

Do have any concerns about co-linearity or endogeneity (omitted variable) bias?

Anything you can do to control for it?

For your “favorite” model(s) plot the predicted against the observed for a few geographic regions

6

Put the models to use!

Specify the Managerial Objective

Apply the “managing at the margin philosophy” by finding the allocation that equates marginal benefits for each tactic with the marginal cost of that tactic.

7

Here’s the mathematical condition, how do we implement it?

Value of conversation × Marginal conversions for each tactic = Marginal cost(s) of tactic(s)

8

What are the recommendations?

Are we under spending on anything?Are we overspending on anything?Are we paying too much attention to one tactic versus the other?What are the recommended allocations for each region?