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An Operations-Research Study of Sales Response to Advertising

Author(s): M. L. Vidale and H. B. Wolfe


Source: Operations Research, Vol. 5, No. 3 (Jun., 1957), pp. 370-381
Published by: INFORMS
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AN OPERATIONS-RESEARCH STUDY OF SALES
RESPONSE TO ADVERTISING

M. L. VIDALE and H. B. WOLFE


Arthur D. Little, Inc., Cambridge, Massachusetts
(Received January 29, 1957)

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.

O PERATIONS RESEARCH has not as yet found many applications


~.-J in the field of advertising. Only a few papers[1-61 on the subject
have appeared in the literature. It is difficult to obtain reliable experi-
mental data. It is probably true that designing original advertising
copy and making a priori estimates of the behavior of the buying public
are not promising material for operations research; there do exist, how-
ever, problems that are of great interest to the advertising man and
that can be studied quantitatively. For example:
1. How does one evaluate the effectivenessof an advertisingcampaign?
2. How should the advertisingbudget be allocated among differentproducts
and media?
3. What criteriadeterminethe size of the advertisingbudget?
The last two questions cannot be answered without a knowledge of ad-
vertising effectiveness; this is where most of the difficulties lie and where
research is most needed. Once the relation between sales response and
advertising has been established, the optimum budget size and allocation
can be determined.
During the past few years, the Operations Research Group at Arthur
D. Little, Inc., has studied these problems and examined sales promotions
for several large industrial concerns. In this paper we wish to present
some generalizations that have been suggested by the results of our ex-
periments.
We shall first describe the type of experimental results we have ob-
tained, and then discuss a simple mathematical model consistent with our
observations.
370

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Sales Response to Advertising 371

EXPERIMENTAL RESULTS: ADVERTISING PARAMETERS


IN ORDER to measure the sales response of individual products to advertis-
ing and to compare the effectiveness of various media, we have performed a
large number of controlled experiments in which the intensity and type of
promotion were varied. With the cooperation of sales and advertising
departments and their advertising agencies, we have been able to run large-
scale tests over considerable portions of the U. S. market. The results of
the tests have in most cases been significant and reproducible. In the
analysis of advertising campaigns, we have found it helpful to describe the
interaction of sales and advertising in terms of three parameters:
1. TheSales DecayConstant
2. TheSaturationLevel
3. TheResponseConstant

We shall introduce these parameters by means of a few sales histories that


exemplify them. The relations and the data in the examples are real.
However, for reasons of industrial security, it has been necessary to conceal
the types of products tested and, in a few cases, to paraphrase the ad-
vertising media.
Sales Decay Constant
In the absence of promotion, sales tend to decrease because of product
obsolescence, competing advertising, etc. Under relatively constant
market conditions, the rate of decrease is, in general, constant: that is, a
constant per cent of sales is lost each year. Figure 1 presents the eight-
year sales history of product A, plotted on a semi-logarithmic scale. This
product exhibits a small seasonality in sales; however, over the years the
sales have been decreasing exponentially. Figure 2 presents the sales
history of a very seasonal product, B. Here again, the monthly sales,
averaged over a full year, 'decay' at a constant rate.
This behavior, which we have observed in a great number of unpromoted
products, leads us to introduce as a parameter the exponential Sales Decay
Constant X; that is, the sales rate at time t of an unpromoted product is
given by S(t)=S(O) exp(-Xt). In the examples above, the Sales Decay
Constants are 0.24 per year and 0.06 per year for products A and B re-
spectively. As'might be expected, the sales decay rate ranges from large
values for products that become quickly obsolescent or products in a
highly competitive market to almost zero for noncompetitive, well-estab-
lished products.
Product C (Fig. 3) exhibits some interesting features when analyzed
with this parameter in mind. The sales of this product were 'decaying' at a

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372 Vidale and Wolfe

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

90.000

8OOOC0

60.000

30,000VC

20,000

ANULAVER~AGE
,F MO NTHL% SALE6

1548 1949 1950 1951 1952 1953 1954 1955

Fig. 1. Unpromoted product A-sales history.

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.

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Sales Response to Advertising 373

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

#500,00v ____

tA 00,000

9100,:00XV0

3o,ooo . ...
30,000..

20,000_____

* ANNUAL AVERAGE
OF MONTHLY SALES

1951 1952 1953 1954 1955


Fig. 2. Unpromoted product B-sales history.

the advertising campaign was small. We conclude that this campaign


could have been considerably shorter and equally effective, and that be-
yond a certain point, it lost its value.
Figure 5 presents the sales history of product E. Because of the
complexity of the sales responses, sales are here plotted on a cumulative
scale.
o Area 1 received a spot radio commercialcampaignfor six months.
* Beginningat the same time, Area 2 receivedthe campaignfor twelve
months.

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374 Vidale and Wolfe

#5,000 - _ _ _ _

4, ooo - - ____

3,oooS

2,000 NO

100.

700~~
90060 @

4.000 0

-J 70
800~~~~~~~~~~~~~~ -

500

19 52 195:3 1gs4 1955

Fig. 3. Product C-sales history.

roo,ooo --
*60,000

40,000 ___ - __

30.000 - - - - - - - - -

~2o,ooo-
(o _= =___.1.I. __S

10,000?~~~~ADVER'fISINC, CAMPAIGN4

5 O N 0 J F M A MJ J A 5 O ND J f M A MJ J A SO ND
A
1953 1- 9 4 1955

Fig. 4. Product D-sales history.

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Sales Response to Advertising 375

* At the end of the campaignin Area 1, Area3 receivedthe campaignfor


six months.
* Area 4 was kept as control and receivedno promotion.
In Areas 1 and 2, sales increased approximately 150 per cenit over those in
Area 4; the additional six months' promotion received by Area 2 did not
increase sales further. Area 3 experienced a similar sales increase after the

#20,000 -

t Area 1I~ __ _ _ __
___ OArea2 2
A Area '3
X Area4 _ - 7
g 15,000 7

501000L /4;6 4
-oI 1- - -- -

J J A 5 O N O J F M A M J J A S O N D
19S4
11955
TEST*PERIOD I ITEST PERIOD 2
Fig. 5. Product E-sales history.

promotion started. Therefore, even though the advertising campaign was


postponed for six months, it lost none of its effectiveness.
From the results exemplified in Figs. 4 and 5, we are led to describe the
interaction of advertising and sales in terms of a second parameter-the
Saturation Level, M, or practical limit of sales that can be generated.
This Saturation Level depends not only on the product being promoted, but
also on the advertising medium used; it represents the fraction of the

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376 Vidale and Wolfe

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

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Sales Response to Advertising 377

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)

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378 Vidale and WVolfe

The sales response to an advertising campaign of constant intensity and of


duration T is shown in Fig. 6.
The rate of sales increase is most rapid at t =0; as saturation, M, is
approached, this rate is reduced. This means that the first advertising
dollar expended is most effective, the second dollar is next most effective,
and so on. A second implication of this advertising model is that for
equal expenditures, a protracted advertising campaign is more profitable
than a short, intense campaign. We have not yet tested this conclusion
experimentally.
Sales Rate
S (t)

M ___________________i______________________

T
TIME (t)

Fig. 6. Sales response to an advertising campaign of duration 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)

where So is the rate of sales immediately preceding the promotion and a


is the total advertising expenditure. The immediate sales increase result-
ing from the promotion is
S (O) _So _ (M _So)(1 _ea ). (5)
The total additional sales generated by this campaign are

eC"dt= M SO(1 - e-ra/M),


| [S(O)-8SOl
which reduces to (ra/X)(M- So)/M for sales well below saturation. The
total extra sales generated by the advertising campaign are therefore the

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Sales Response to Advertising 379

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:

f Ck(t) eIkI dtf Rk(t) e-Ikt dt. (6)

Under the assumption that production and distribution costs are pro-
portional to sales, we have

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380 Vidale and Wolfe

Ck(t)=fk Rk(t)+ak, (7)


where fk is the ratio of production and distribution costs to selling price.
Assuming that the rate of sales of the unpromoted product decays ex-
ponentially at the rate Xk, we have
Rk(t) Rok e k, (8)
where Rokis the instantaneous sales increase resulting from the campaign.
Substituting (7) and (8) into equation (6), we obtain
00 00

ak+ jfk Rok e-Xkt elk it-= Rok*


e-Xkt
I
kt dt.

Integrating and solving for Ik:


Ik = (Rok/ak) (1 -fk) -Xk. (9)
It should be noted that the relation between Rx and ak is not linear, so the
rate of return Ik is a function of the intensity of the advertising campaign.
Once the values of Ik are known, one can in principle select the products
that may be advertised profitably. The rate of return considered ac-
ceptable by managemnentvaries considerably from company to company,
but remains relatively constant in time.
We see that the amount of advertising appropriate to each product,
and consequently the total advertising appropriation, can be determined
once the Ik are known.
SUMMARY
IN SUMMARY, we wish to stress the following points:
1. When carefullydesignedand executed,advertisingexperimentsgive results
that are both reliable and reproducible. The degree of accuracy attainable is,
however,considerablysmallerthan would be consideredacceptablein many other
fields of research. Product advertising gives quick results; the pretesting of
proposedproductadvertisingcampaigns,therefore,is especiallyattractive.
2. The responseof sales to advertisingvarieswidely fromproductto product,
but some generalizationsare possible. The responseof individualproductsto an
advertising promotion may be characterized by two parameters: Response
Constant and SaturationLevel. A third parameter,the Sales Decay Constant,
gives the rate at which customersare lost.
3. A mathematicalmodel of sales response,based on these three parameters,
has provedusefulin the analysisof advertisingcampaigns. By meansof this model
one can compute the quantities needed to evaluate and comparealternate pro-
motionalcampaigns.
4. A knowledgeof sales responseto advertisingfor each productpermitsone to
evaluate the returnthat can be expectedfrom capital invested in advertisingfor
each product. With this informationit is then possible to select profitablead-

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Sales Response to Advertising 381

vertising programsand to estimate the optimum total size of the advertising


budget.
We do not know whether the model of sales response discussed in this
paper will prove applicable to all situations; our experience is limited to a
few industries, and we have not tested all advertising media. It is our hope
that as these studies progress and as the volume of experimental data
grows, it will be possible to refine the model and thus increase its useful-
ness.
We wish to express our appreciation to SHERMAN KINGSBURY, GEORGE
E. KIMBALL, and FRANK T. HULSWIT, who, in their studies of advertising
effectiveness, first developed many of the ideas expressed in this paper and
helped to demonstrate the value of the operations-research approach to
sales problems.
REFERENCES
1. HORACE C. LEVINSON,"Experiences in Commercial Operations Research,"
Opns. Res. 1, 220 (1953).
2. BERNARD 0. KOOPMAN, "The Optimum Distribution of Effort," Opns. Res.
1, 52 (1953).
3. JOHN F. MAGEE, "The Effect of Promotional Effort on Sales," Opns. Res. 1,
64 (1953).
4. ROBERT DORFMAN AND PETER 0. STEINER, "Optimal Advertising and Optimal
Quality," Amer. Econ. Rev. 44, 5 (1954).
5. R. S. WEINBERG, "Multiple Factor Break-Even Analysis," Opns. Res. 4, 152
(1956).
6. A. A. BROWN, F. T. HULSWIT, AND J. D. KETTELLE, "A Sttudy of Sales Oper-
ations," Opns. Res. 4, 296 (1956).

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