Dynamic Effectiveness of Advertising and Word-of-mouth in the Sequential Distribution of Short Lifecycle Products

Firms in many industries release or distribute their new products, often those that have shorter lifecycles, in a sequence of stages. It is often their practice as well to launch separate advertising campaigns at each distribution stage. In this context, promotion mix elements, advertising and word-of-mouth (WOM), can play important, separate, and yet interdependent roles in stimulating demand, often with the effectiveness of both elements varying within and across distribution stages. We thus construct a model to investigate the dynamic effects (e.g., forgetting and wearout) of advertising and WOM on the demand for a new product at each stage in its sequential distribution. We use the model to study perhaps a canonical example, the theater-then-video sequential distribution of the U.S. motion pictures; and estimate its parameters using a combination MCMC and Kalman Filtering/Smoothing ideas. Results showed for example that advertising and WOM were both more effective during the later video than during the earlier theatrical distribution stage, due to lower rates of forgetting and wearout. As a result, an optimization exercise found that studios could have increased the revenues of 78% of the films in our sample by reducing their ad expenditures during the theatrical stage and increasing them during the video stage.