A stochastic model of consideration set sizes

Abstract

AbstractThis paper proposes a new model of consideration set sizes, which relies on a stochastic modelling approach to better understand data patterns. The paper combines the Poisson distribution with the lognormal distribution proposed by Hauser and Wernerfelt (1990) to create the Poisson lognormal (PLN) model of consideration set sizes. An advantage of PLN is that it allows variance within a given individual consumer. This is a crucial factor for brand managers who wish to choose a particular market to promote their brand, as a higher within‐individual variance suggests that there is more chance for a consumer to change their consideration set size, whereas a lower within‐individual variance indicates that a consumer tends to stick to his/her consideration set size. The paper then uses 10 datasets including service, durable and fast‐moving consumer goods across four countries to validate the new model and compare it with the lognormal model. The results show that PLN gives a good fit to these data. It outperforms the lognormal model. The average mean absolute percentage error of the PLN model is 12 per cent, whereas that of the lognormal model is 26 per cent. For managerial implications, the paper proposes a better tool to help brand managers analyse the nature and intensity of competition that is facing their brands. Also, relying on its stochastic element, the proposed model can help brand managers predict future brand consideration by their consumers, as well as evaluate any change in brand consideration, caused by marketing activity such as sales promotion and advertising. Copyright © 2014 John Wiley & Sons, Ltd.