Impact of Resource Allocation Rules on Marketing Investment-Level Decisions and Profitability

Abstract

In many organizations, marketing investment-level decisions precede the associated resource allocation decisions and are based on market-level sales response data, often with no attention to the impact of rules used to allocate resources to submarkets. Such top-down budgeting is commonly based on a perception that aggregate sales and profitability are affected much more by the level than by the allocation of the investment. The authors analyze the effects of different resource allocation rules assuming alternative specifications of submarket sales response functions and show that allocation decisions significantly influence aggregate sales response functions, investment-level decisions based on these functions, and realized profit. The authors also show aggregate sales and profit are usually more sensitive to improvements in allocation rules than to increases in investment levels and conclude that resource allocation decisions warrant more attention in marketing budgeting.