Marketing Agencies, Media Experts and Sales Agents: Helping Competitive Firms Improve the Effectiveness of Marketing

Abstract

A major challenge for marketers is how to spend a marketing budget such that the impact on a target market is maximized. There are numerous organizations including marketing agencies, media experts and sales agents that promise to deliver more impact for the money a firm allocates to marketing. The service that these organizations offer are to organize and coodinate spending such that a higher fraction of the potential market is effectively reached by a firm's marketing effort. My objective is to understand the optimal strategy that marketing agencies, media experts and sales agents should use to sell these services. In particular, I analyze how these services should be priced and whether a seller gains by selling such services exclusively. The model consists of a seller of marketing services and two symmetric firms that compete in a differentiated market. A downstream firm that purchases the services reaches a higher fraction of the potential market due to the efficiency provided by the services. The analysis shows that the optimal selling strategy for the services is a function of three factors: a) the degree of differentiation between firms, b) the fraction of the target that is reached by firms (prior to using the seller's services) and c) the increase in reach provided by the seller's services. Non-exclusive selling is likely to be optimal, the less that downstream firms compete with each other due to strong differentiation in the downstream market or a low level of overlap in the customers reached by the marketing of each downstream firm. In contrast, exclusive selling is advantageous when many customers have been reached by the marketing of both firms or the level of differentiation between the firms is low. Surprisingly, in many situations, the seller's profit is inversely related to the level of differentiation.