Consumers like to be surprised
A substantial part of successful marketing strategy consists of surprising the brand’s prospects and customers with new-value propositions. For example, since consumers are known to “learn quickly and forget slowly,” it pays to allocate advertising budgets in “spending bursts” in the form of campaigns, as opposed to spending evenly across the year. Similarly, offering sales promotions as “surprises” prevents consumers from anticipating them and strategizing their purchasing around below-normal prices. Likewise, new-product introductions should not be so predictable as to enable consumers to postpone their current consumption and wait for the new product to appear. These behaviors are even more relevant in cases when competitive reaction is fierce, so the brand’s competitors cannot easily anticipate its marketing moves.
Finance managers and investors prefer predictability
While the sales and revenue benefits of these marketing principles are generally known and often quantified by marketing analytics, their impact on revenue and cash flow volatility is typically ignored. And yet, such volatility effects are important from a financial perspective. Indeed, if company revenues fluctuate around two regimes, say one base-level regime and one marketing-induced regime, the resulting volatility makes it more difficult to project the company’s future revenues and earnings and ensure steady cash-flow. This is known to lessen investor confidence and, as such, can harm the financial health of the brand. So, effective marketing can have undesired financial side effects.
As there may be a potential conflict between the typical marketing objective of sales impact maximization and stable revenue and cash flow generation, which are typical operations and financial management objectives, we set out to learn more about the interrelationship of these effects. We analyzed several predictions from theory with a large data set of 99 pharmaceutical brands from four European countries. Our aim was to estimate if marketing volatility effects were big enough to warrant executive attention, to identify drivers of marketing spending volatility and to learn about the optimal marketing expenditure level. Further, we investigated if companies actively manage volatility across their product portfolio and provide some recommendation on how to manage volatility risk.