Marketing Mix Modelling and Return on Investment
The marketing mix model is a widely used tool to evaluate Return on Investment (ROI) and inform optimal allocation of the marketing budget. Economics and econometrics lie at the heart of the process. In the first place, the model structure is derived from microeconomic theories of consumer demand ranging from single equations of product sales to full interactive systems of brand choice. Secondly, econometric techniques are used to estimate demand response to marketing investments, separating product sales into base and incremental volume. Base sales represent the long-run or trend component of the product time series, driven by factors ranging from regular shelf price and selling distribution to underlying consumer brand preferences. Incremental volume, on the other hand, is essentially short-run in nature, capturing the week-to-week sales variation driven by temporary selling price, multi-buy promotions and above the line media activity. These are converted into incremental revenues or profits and benchmarked against costs to calculate ROI to each element of the marketing mix.
KeywordsPrice Elasticity Price Sensitivity Base Sale Loyal Consumer Marketing Effect
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