Author:

Keywords:

Social Sciences, Business, Business & Economics, business cycle, optimal allocation, elasticity, recession, international tourism, Bayesian models, regression, RESEARCH-AND-DEVELOPMENT, ECONOMIC CONTRACTIONS, IMPACT, SALES, PRODUCTS, TIMES, 1505 Marketing, Marketing, 3506 Marketing

Abstract:

© 2017 INFORMS. A key conundrum facing organizations is how to adjust marketing budgets in response to the business cycle. While most firms use procyclical spending (spending less during economic contractions), academic studies often recommend countercyclical spending (spending more during contractions), which begs the following question: What is the right thing to do? The spending problem is compounded further when demand is not just driven by one country’s business cycle, but by the (nonsynchronized) business cycles of multiple countries, as is the case for tourism marketing aiming to attract tourists originating from different countries. We derive insights into the best way to allocate marketing budgets across countries under varying economic conditions.We show that the allocation decisions are driven by the procyclical versus countercyclical nature of three factors: unit sales, marketing effectiveness, and per-unit profit contribution. To study how unit sales and marketing effectiveness respond to the business cycle, we develop a transfer function dynamic hierarchical linear model. We also model the responsiveness of the profit contribution to the business cycle. In an application to New Zealand tourism marketing, we find that a reallocation of the government’s marketing budget could yield an increase in tourist revenues of NZD $121 million.