Dynamic Effectiveness of Advertising and Word of Mouth in Sequential Distribution of New Products

Abstract

Firms in many industries release new products in sequential stages. They also launch separate advertising campaigns at each distribution stage. Thus, communication mix elements—advertising and word of mouth (WOM)—can play important, distinct, and yet interdependent roles in stimulating new product demand. Their effectiveness may fluctuate within and across stages and spill over from earlier to later stages. Thus, the authors construct a dynamic linear model to study the dynamic effects of advertising and WOM on demand for heterogeneous products across stages. They further apply the model to examine a canonical example, the theater-then-video sequential distribution of motion pictures, and estimate the parameters using Kalman filtering/smoothing and Markov chain Monte Carlo methods. The results show that advertising and WOM exert dynamic, yet diverse, influences on demand for new products. For example, while increased ad spending is more effective at an earlier stage due to repetition wear-in and synergy with WOM, increased WOM activities at a later stage could become more powerful in driving demand. Subsequent optimization exercises suggest that films of varied characteristics can potentially re-allocate their advertising budgets and reap additional revenues.

The impact of pre- and post-launch publicity and advertising on new product sales

“…Although the dynamic effects of advertising are well documented (e.g., Bruce et al, 2012;Frison et al, 2014), little knowledge exists on the dynamic effects of publicity on sales, particularly with respect to the relative effectiveness of these communication formats during the pre-launch and post-launch phases. In both phases, consumers lack reliable information on the product.…”

Why Amazon uses both the New York Times Best Seller List and customer reviews: An empirical study of multiplier effects on product sales from multiple earned media

“…First, the benefits of different media activities vary and therefore one may not serve as a substitute for another. For example, advertising works most effectively at an early stage of product introduction and wears out later as consumers pay more attention to word of mouth (WOM) [10]. Once a product has become familiar to the public, the primary role of advertising is a reminding one, while social engagement functions by both reminding and enhancing enjoyment.…”

“…However, no other publisher of a best seller list can rival the New York Times' combination of journalistic respect -having won the Pulitzer Prize 112 times, and readership -having the third largest circulation in the U.S. A recent study finds that appearing on the New York Times Best Seller List increases a book's sales [24]. Consumers themselves, rather than experts or celebrities, convey messages through emerging media activities such as blogs [16]; forums [3]; online referral [25]; and user review [10]. Electronic WOM is shown to positively impact sales of books, movies, automobiles, and other products [12,26].…”

Using online search data to forecast new product sales

“…These include Bruce and Foutz (2007) and Lehmann and Weinberg (2000) who focus on theater and home video releases, Basuroy, Desai, and Talukdar (2006) who focus on sequels, Elberse and Eliashberg (2003) who focus on international markets, and Luan and Sudhir (2007) who focus on the DVD market.…”