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The marketing mix effectiveness

premium for market leaders in the

fast moving consumer goods sector

Master thesis defence

Sven Luijmers

s3010414

Supervisors

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Background

• “Under most circumstances, enterprises that have achieved a high share of the markets they serve are

considerably more profitable than their smaller-share rivals”

(Buzzell, Gale, & Sultan, 1975)

.

Advantages for market leaders:

• The market leaders have more market power to influence consumer

(e.g. Ailawadi, Farris, & Parry, 1999; Mabkhot, Shaari, &

Salleh, 2017; Mukhopadhyaya, Roy, & Raychudhuri, 2012)

.

• Market leaders benefit more from scale economies

(e.g. Ingene, 1984; Sharp, Riebe, Dawes, & Danenberg, 2002; Szymanski et al., 1993)

.

• Market leaders experience a price premium. Better perceived quality of products

(e.g. Akerlof, 1970; Apelbaum, Gerstner,

& Naik, 2003; Fan, Ju, & Xiao, 2016; Sethuraman & Cole, 1999)

.

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Research question

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Conceptual model

Figure 1

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Included brands

• Four years of weekly data (week 29, 1994 through week 28, 1998).

• The three largest supermarket chains in the Netherlands (based on a sample of ±350 stores).

Thresholds:

Only branded products.

Active > 15% of weeks with all single tools.

Active in full range of 208 weeks.

Table 1

Overview of included product classes and categories

Product classes

Categories

Number of brands

per category

Example brands

Beverages

Cola

4

Coca Cola, Pepsi

Pilsners

4

Heineken, Grolsch

Ground coffee

4

Douwe Egberts, Kanis & Gunnink

Food

Chips

3

Smiths, Croky

Candy bars

4

Mars, Twix, Milkyway

Dry soup

3

Honig, Knorr

Personal care

Deodorant

4

Sanex, Nivea, AXE

Toothpaste

4

Aquafresh, Prodent

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Error correction model

DA

bt

Display Advertising of brand b in week t

+

P

bt

Price increase of brand b in week t

-

P

bt

Price decrease of brand b in week t

Q1,2,3

bt

Dummy controlling for seasonality

π

Adjustment effect

where

First difference operator

S

bt

Volume sales of brand b in week t

α

b0

Intercept of brand b

MA

bt

Mass Advertising expenditures of brand b in week t

FA

bt

Feature Advertising of brand b in week t

Model is estimated twice: once for market leader brands and once for follower brands.

• Long-term parameters > Delta Method

(Greene, 2003)

.

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Mass advertising expenditures

• More effective for followers than for market leaders.

• Main advantage for followers is gained on the short-term:

• Mass advertising expenditures market leaders beyond the optimum.

• Spend heavy amount on building positive image of the brand.

• Brand image > increases loyalty > consumers purchase

(e.g. Mabkhot et al., 2017; Yoo et al., 2000)

.

• Lower advertising elasticities are common in CPG categories

(Allenby & Hanssens, 2004)

.

Table 1

Elasticities mass advertising expenditures

Marketing mix tool

Market leader

Follower

Mass advertising

Short-term

𝛽1

𝑠𝑡

Non-significant

0.0007

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Elasticities feature advertising

Marketing mix tool

Market leader

Follower

Feature advertising

Short-term

𝛽2

𝑠𝑡

0.0087

0.0099

Long-term

𝛽7

𝑙𝑡

0.0125

0.0126

Feature advertising

• Equally effective for market leaders and followers.

• Expected: stronger effects on the short-term, and smaller effects on the long-term.

• Even short-term oriented tools like search engine marketing and banner ads have long-term effects that

differ per target group

(Breuer & Brettel, 2012)

.

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Elasticities display advertising

Marketing mix tool

Market leader

Follower

Display advertising Short-term

𝛽3

𝑠𝑡

0.0123

0.0072

Long-term

𝛽8

𝑙𝑡

Non-significant

0.0095

Display advertising

• Short-term advantage for market leaders.

• Long-term advantage for followers.

• Expected: stronger short-term effect and a smaller long-term effect.

• Market leaders deal with post-promotion dip

(e.g. van Heerde, Leeflang, & Wittink, 2000; Leone, 1987)

.

• Accelerate their purchases in response to a promotion, they buy earlier and/or purchase larger

quantities.

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Elasticities pricing

Marketing mix tool

Market leader

Follower

Price increase

Short-term

𝛽4

𝑠𝑡

-0.7900

-1.1585

Long-term

𝛽9

𝑙𝑡

-0.3695

-0.6452

Price decrease

Short-term

𝛽5

𝑠𝑡

-1.9837

-2.3657

Long-term

𝛽10

𝑙𝑡

-0.3896

-0.6214

Pricing

(1/2)

• Short-term price decreases have a larger positive effect on sales, than short-term price increases will lead to

a loss in sales for both market leaders and followers.

• Long-term effect for price increase and decrease elasticities are equal so cancels out for both market leaders

and followers.

• For market leaders and followers the price decrease elasticity is stronger on the short-term than the

long-term.

• We assume they experience a post-promotion dip

(e.g. van Heerde, Leeflang, & Wittink, 2000; Leone, 1987)

. Consumers buy earlier and/or purchase larger

quantities.

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Elasticities pricing

Marketing mix tool

Market leader

Follower

Price increase

Short-term

𝛽4

𝑠𝑡

-0.7900

-1.1585

Long-term

𝛽9

𝑙𝑡

-0.3695

-0.6452

Price decrease

Short-term

𝛽5

𝑠𝑡

-1.9837

-2.3657

Long-term

𝛽10

𝑙𝑡

-0.3896

-0.6214

Pricing

(2/2)

• Market leaders suffer less from a price increase, but also experience a smaller price decrease effect.

• Price increase: Market leaders are better able to increase prices with loosing less sales compared to the

followers who would follow the price increase.

• Brand image > increases loyalty > consumers purchase

(e.g. Mabkhot et al., 2017; Yoo et al., 2000)

.

• Price decrease: Followers are more effective with a decrease. A price reduction will gain more sales

compared to market leaders who would follower the price decrease.

1

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Overview conclusions

• Market leader effectiveness premium:

• Short-term price increase elasticity.

• Long-term price increase elasticity.

• Short-term display advertising elasticity.

• Followers effectiveness premium (counterintuitive to expectations):

• Short-term mass advertising expenditures elasticity.

• Long-term display advertising elasticity.

• Short-term price decrease elasticity

• Long-term price decrease elasticity.

• Equal effectiveness:

• Long-term mass advertising expenditures elasticity.

• Short-term feature advertising elasticity.

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Limitations and future research

• Only pricing and advertising marketing mix tools:

Higher short-term and long-term sales elasticities for product and distribution, and smaller elasticities for

advertising and price decreases

(Ataman et al., 2010)

.

> Replicate study with adding product and distribution as important marketing mix tools.

• Storable FMCG-products:

The used categories are “storable” FMCG-products, which result in post promotion dips

(van Heerde et al., 2000; Leone, 1987)

.

> Replicate research setting with less storable product categories.

• Only focused on branded products:

Recent years made firms begun to advertise their private labels

(e.g. Corstjens & Steele, 2008; Lamey et al., 2012)

.

> Replicate research setting and focus on private labels.

• Mass advertising optimum:

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Apelbaum, E., Gerstner, E., & Naik, P. A. (2003). The effects of expert quality evaluations versus brand name on price premiums. Journal of Product & Brand Management, 12(3), 154–165. https://doi.org/10.1108/10610420310476915 Ailawadi, K. L., Farris, P. W., & Parry, M. E. (1999). Market share and ROI: Observing the effect of unobserved variables. International Journal of Research in Marketing, 16(1), 17–33. https://doi.org/10.1016/S0167-8116(98)00012-3 Ataman, M. B., Van Heerde, H. J., & Mela, C. F. (2010). The Long-Term Effect of Marketing Strategy on Brand Sales. Journal of Marketing Research, 47(5), 866–882. https://doi.org/10.1509/jmkr.47.5.866

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Corstjens, M., & Steele, R. (2008). An international empirical analysis of the performance of manufacturers and retailers. Journal of Retailing and Consumer Services, 15(3), 224–236. https://doi.org/10.1016/j.jretconser.2007.06.004

Fan, Y., Ju, J., & Xiao, M. (2016). Reputation premium and reputation management: Evidence from the largest e-commerce platform in China. International Journal of Industrial Organization, 46, 63–76. https://doi.org/10.1016/j.ijindorg.2016.01.004 Greene, W. H. (2003). Econometric analysis (5th ed.)Englewood Cliffs, NJ: Prentice Hall.

Ingene, C. A. (1984). Scale Economies in American Retailing: A Cross-Industry Comparison. Journal of Macromarketing. https://doi.org/10.1177/027614678400400205

Lamey, L., Deleersnyder, B., Steenkamp, J.-B. E. ., & Dekimpe, M. G. (2012). The Effect of Business-Cycle Fluctuations on Private-Label Share: What Has Marketing Conduct Got to Do with It? Journal of Marketing, 76(1), 1–19. https://doi.org/10.1509/jm.09.0320

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Mukhopadhyaya, J. N., Roy, M., & Raychudhuri, A. (2012). Determinants of Market Share, Profitability and Market Power at the Firm Level in the Cement Industry of India. Vilakshan: The XIMB Journal of Management, 9(1), 95–114. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bah&AN=74258378&site=ehost-live

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