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Source: Operations Research, Vol. 5, No. 3 (Jun., 1957), pp. 370-381

Published by: INFORMS

Stable URL: http://www.jstor.org/stable/167271 .

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AN OPERATIONS-RESEARCH STUDY OF SALES

RESPONSE TO ADVERTISING

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.

~.-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

All use subject to JSTOR Terms and Conditions

Sales Response to Advertising 371

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

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

All use subject to JSTOR Terms and Conditions

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

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.

All use subject to JSTOR Terms and Conditions

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

Fig. 2. Unpromoted product B-sales history.

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.

All use subject to JSTOR Terms and Conditions

374 Vidale and Wolfe

#5,000 - _ _ _ _

4, ooo - - ____

3,oooS

2,000 NO

100.

700~~

90060 @

4.000 0

-J 70

800~~~~~~~~~~~~~~ -

500

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

All use subject to JSTOR Terms and Conditions

Sales Response to Advertising 375

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.

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

All use subject to JSTOR Terms and Conditions

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

All use subject to JSTOR Terms and Conditions

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)

All use subject to JSTOR Terms and Conditions

378 Vidale and WVolfe

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)

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)

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

| [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

All use subject to JSTOR Terms and Conditions

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:

Under the assumption that production and distribution costs are pro-

portional to sales, we have

All use subject to JSTOR Terms and Conditions

380 Vidale and Wolfe

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

e-Xkt

I

kt dt.

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-

All use subject to JSTOR Terms and Conditions

Sales Response to Advertising 381

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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