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Transcript of Bayer
2009-2010 ISMS-MSI Practice Prize Competition
Dynamic Marketing Budget Allocation across Countries, Products, and Marketing ActivitiesMarc Fischer (University of Passau) Snke Albers (Christian-Albrechts-University at Kiel) Nils Wagner (University of Passau) Monika Frie (Bayer AG)
Cambridge, MIT, January 15, 2010
Bayer in 2006 a healthy company
EUR 29 bn (US$ 40 bn) sales 106,000 employees worldwide EBITDA EUR 5.5 bn (US$ 7.8 bn) Very comfortable 20% EBITDA margin
Source: Bayer Annual Report (2006) Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Bottom-up allocation process at Bayer
Local country managers report their budget needs upwards
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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lead to inefficient and suboptimal allocation decisions
Gut feeling guides management decisions Very strong influence of negotiation skills Local managers learn how to manipulate allocation process
Politics and tensions shape the decision process instead of fact-based discussions
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Money is left on the table
1
Missed opportunities to promote markets with highest growth potential
2
Insufficient resources for countries and products with highest ROI
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Marketing theory confirms that
The profit improvement potential from better allocation of a total marketing budget is much higher than from optimizing the total budget!
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Video message Dr. Monika Frie (Bayer AG)
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Contribution to marketing theory and practice
Innovative allocation tool
Fact-based and focused on relevantcharacteristics
Insights into the solution structure Application to Bayers Primary Careportfolio (36 products with sales > US$ 4 bn)
Implementation
Impact
Profit improvement potential from betterallocation > 50% (DCF=US$ 685 m)
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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AGENDA
The Allocation Problem Company and Market Background Problem Solution The AllocationHeuristic
Implementation and Impact at Bayer
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Bayers Primary Care business (EUR 3.1 bn / US$ 4.5 bn)
Therapeutic areas Hypertension Infectious diseases
Leading brands Adalat Avelox Ciprobay EUR 626 m (US$ 870 m) EUR 445 m (US$ 618 m) EUR 338 m (US$ 470 m) EUR 341 m (US$ 474 m) EUR 304 m (US$ 423 m)
Erectile dysfunction Diabetes
Levitra Glucobay
Source: Bayer Annual Report (2008) Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Pharmaceutical marketing activities
Detailing Ads in professional journalsWerbungactivities Other in Fachzeitschriften
Physician oriented
(e.g., symposia invitations)
Marketing activities Direct-to-consumer advertising (only US) Patient oriented Below the lineactivities (e.g., PR)
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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AGENDA
The Allocation Problem Company and Market Background Problem Solution The AllocationHeuristic
Implementation and Impact at Bayer
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Constrained dynamic profit maximization problem
(tT)
Discount Countries Products Profit con- tribution Time factort kit
Unit saleskit
(kK)
(iIk)
k i Activities Marketing expense(nNi)
kint
Max!
Discounted net value of product portfolio where Unit sales = f(life cycle, marketing expense, etc.)
Restrictions
(1) (2) (3)
k i n Marketing expensekint = Total BudgettMarketing effects decay at a constant rate over time Boundary conditions (e.g., positive marketing budgets)
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Optimal solutionOptimal allocation weightkint
Optimal budgetkint =
Products Activities Optimal allocation weightkint Countries(kK) (iIk) (nNi)
Total budget
t
Optimal allocation = weightkint
Profit con- Optimal unit Optimal mktg.+ Optimal growth tributionkit saleskit elasticitykint elasticitykit 1 + Discount rate Marketing carryoverkin
Optimal values only available from numerical optimization
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Heuristic allocation weight
Last periods marketing elasticity Discount Marketing 1+ rate carryover
Profit con- Last tribution periods margin (%) revenue
Expected revenues in T periods Last periods revenues
1(Discounted) long-term marketing effectiveness
2Size of profit contribution
3Growth potential(T = Planning horizon)
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Performance of heuristic allocation rule (16 experimental situations)
Both scenariosDegree of suboptimality (profits)
Monopoly
Duopoly
5% 4% 3% 2% 1% 0% 1 3 5 7 9 11Planning cycle
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Data for empirical application at Bayer
10 years (1996-2006) of quarterly marketing and sales data Countries: France, Germany, Italy, Spain, U.K.
Types of product: Hypertension, Antiinfectives, Erectile dysfunction, Antidiabetics
525 Bayer and competitor products
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Market response model
Type
Double-log model Accommodates nonlinear andinteraction effects
Marketing mix
Stocks for own and total competitive marketing expenditures Own and competitive price Brand/quality effects
Other variables
Asymmetric life cycle Order of entry Country and seasonal effects
Fischer, Albers, Wagner, and Frie (Dynamic Marketing Budget Allocation)
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Model validation and robustness
Model fit
Very good in-sample fit with R > .93
Holdout prediction
High R (>.92) and low MAPE(