Skip to main content

Marketing Expenditure Budgeting: from the Upper Echelon to the Lower Echelon

Periodic Reporting for period 1 - MARKETING EXPENDITUR (Marketing Expenditure Budgeting: from the Upper Echelon to the Lower Echelon)

Reporting period: 2015-11-01 to 2017-10-31

Firms set budgets to fund marketing activities. The importance of well designed marketing campaigns is undisputed, but overspending in marketing erodes profits and harms social welfare. From the regulator’s perspective, it is not feasible to interfere with firms’ decision on marketing expenditure. Firms will only align their behaviour to regulators’ goal, when it is beneficial for them to do so. Therefore, the goal of this research was to find a way that helps firms to set a level of marketing expenditure, which is in line with regulators’ expectation, while taking into consideration firms’ inherent incentive to maximize profit. The solution is to identify marketing expenditures that is optimal for firms.

In my study, I employed a pragmatic approach. Instead of generating normative criteria for optimal marketing expenditure, I aimed to help firms to design a better budgeting process. By studying the ‘task environment’ where a marketing budget is proposed, negotiated, executed and reviewed, I was able to 1) obtain insights on factors that lead to overspending in marketing 2) give feasible and actionable advices to firms that suffered from inefficient marketing expenditure spending. As aforementioned, the implications of my research are beneficial to both firms and the society as a whole.
The direct impact of this study enables firms to save from excessive spending in marketing and result in higher profit. More importantly, the indirect impact saves consumer from price increase due to overspending in marketing expenditure.

Conclusions of the action:
a). A completed paper in the Journal of Marketing or Journal of Marketing Research, the expected date of submission is February 2018 (after thorough discussion and feedback from my colleagues).
Further results are:
b). 10 in-depth interviews with marketing and financial executives
c). A comprehensive steering committee of this project includes colleagues from the Erasmus School of Economics, IESE and Wim van der Stede (LSE), and from the counterparts of MSI/AMA in the controlling side – such as FEI Financial Executives International, AICPA – American Institute of CPAs and IMA – The Association of Accountants and Financial Professionals in Business, for quality control and dissemination.
d). One day Symposia on Marketing Expenditure at Erasmus University Rotterdam (EUR) with both academicians and industrial practitioners to disseminate our research output. The event is planned in January 2018.
I conducted the research in four phases.

Phase 1:
To better understand the phenomenon of marketing spending from a managerial angle, I have conducted 10 in-depth interviews with marketing and finance executives. I have also met, in 2016, with MSI’s executive director, Kay Lemon and with executives at the American Marketing Association (AMA) , e.g. Chris Bartone and Marisa McCarren, who confirmed that the research questions I planned to address fit with key research priorities of both MSI and AMA and agreed to move forward with this collaboration. At this stage, and in order to ensure the external validity of the study, I (1) decided to use data and model triangulation (different data sources and methodologies) and (2) agreed with the Marketing Science Institute and AMA to set up a steering committee that ensured that my variables and research questions addressed pressing concerns of the managerial community.

Phase 2:
I conducted a longitudinal experiment with students using a marketing strategy simulation at EUR. I used data from a marketing strategy simulation game provided by StratSim. The game was played by master students in marketing. It simulated a vehicle market with five firms. The goal of this phase was to (1) calibrate a simulation method that allowed me to identify whether a firm is underspending, spending (nearly) optimally or overspending in marketing (an extension of Mantrala et al’s JM 2007 algorithm) and (2) pretest my conceptual model with data from a controlled, yet realistic, environment. I have collected the data and finished the algorithm. Results:
1). Provide a diagnostic tool for firms to know their position on the profit function. Generate a condense interval that covers a range for the optimal investment with 95% probability.
2). The inter-relationship between different types of vehicles within the same firm is different across different firms.

Phase 3:
I have used a large-scale international survey among marketing and finance managers to study drivers of overspending across a vast array of industries and countries. I used a large cross-national data to understand the drivers of overspending in a variety of contexts. In the first part of my research I focused on the US and four European economies, namely Belgium, Germany, Spain, the Netherlands and the UK. After design and pre-testing of the survey and roll-out the full survey internationally, I will be in a position to obtain results in the first quarter of 2018.

Phase 4:
With the survey study I could zoom inside the organization and investigate the working dynamics of the budgeting process. I have tested the hypothesis with survey data to generate decision dynamics in different firms under different industrial contexts. To ensure the robustness as well as the external validity of the results, I have run a policy experiment. The outputs are as follows:
1) Behavioral insights that will guide higher management to enhance their decision dynamics for marketing expenditure decision.
2) Dollar value estimates of the benefits of improved decision styles.
I designed the following different channels and strategies to reach out to different groups of audience:
-Industrial benchmark report.
Benchmark reports are made to extract interesting findings from my paper. It is be sent to survey participants as promised in the survey.
In the symposium, our research findings are shared with the attendants. I have also invited speakers from different companies to share the marketing and finance working dynamics. The symposium will run online and offline.
-Conference Presentation.
I have attended both academic and industrial conferences to present our work. As described in phase I, I have visited relevant organizations in both academia and industry to ensure that my research is profound and actionable.
The research project concerning marketing budget is extremely relevant for master students majoring in marketing. As described in phase2, I combined my teaching with this research project to elaborate our research topic.
-Master Thesis.
Since I also advise student working on their master thesis, I have set this project as one of the research topics. Students who select this topic either validate my findings with more samples or they may use our findings when they are conducting research with firms.
-Corporate Training.
Prof. Stremersch has a strong reputation in both the Netherlands and Belgium. He is often invited to give training courses to corporates and he will also use this to disseminate and commercialize our findings.
This research is targeting at top marketing journals with great impact, such as the Journal of Marketing.