Hysteresis In Market Response: When Is Marketing Spending An Investment?

Abstract

Conventional wisdom says that it takes ever increasing marketing budgets and/or lower prices to create sustained growth in sales, which may or may not be profitable in the long run. However, some documented cases and conceptual evidence suggest that marketing spending or prices can exhibit hysteresis in market response, a condition where temporary changes in the marketing mix are associated with permanent movements in sales performance. As such, hysteresis creates a long-run investment benefit from marketing actions, which can be highly beneficial to the firm, or detrimental to competition. Yet the assessment and formal implications of market response hysteresis for marketing resource allocation are unexplored. This paper addresses the modeling of marketing hysteresis in three ways: one, it shows how the presence of full vs. partial hysteresis in response may be assessed from longitudinal data on sales and marketing-mix allocations. Two, it develops the link between sales hysteresis and profit hysteresis, and derives the long-run optimal spending rules for a firm whose marketing efforts exhibit some form of hysteresis. Three, it illustrates both the measurement of hysteretic marketing effects and their optimal spending implications for a leading supplier of computer printers. The paper concludes with an agenda for future research in this important, yet under-researched area of marketing strategy.