1. Maintaining Market Share Growth: Optimal Budget Allocation to Loyalty and Sales Promotion Programs Hsiu-Yuan Tsao Associate Professor Department of Business Administration Tamkang University TAIWAN 33th INFROMS Marketing Science Conference

2. ABSTRACT This study employs a first-order Markov-type market share model to examine the differential unit cost of marginal effect and the spending for promotion and loyalty programs on market share. Sensitivity analysis with a spreadsheet is used to help determine optimal budget allocations for both programs over a multi-period during which the dual aim is to keep the overall budget to a minimum and to maintain growth in market share. We apply this approach to data from a 2009 consumer panel provided by Taylor Nelson Sofres (TNS) Global Taiwan for the adult milk product category, based on the given initial size of market share and loyalty effect and on an estimation of the promotion effect, using empirical data concerning the outlay budgeted for these two programs.

3. Markov Market Share Model Loyalty Effect the proportion of customers whose choice of brand on the next occasion is simply to purchase the same as before as a result of their satisfaction Promotion Effect the proportion of customers whose choice of purchase on the next occasion, whether the same brand or not, is affected by marketing mix activities The brand share of the th brand at time is given by

4. Estimation Effect of Loyalty Program A share of the category requirement (SCR) is commonly used by marketing practitioners to represent the loyalty statistic, namely loyalty, in the marketing literature (Bhattacharya et al., 1993; Ehrenberg et al., 2004), Effect of Promotion Program the least squares method being used to estimate the from these time series. the promotion effect for each brand at period is solved as follows:

5. The Objective Function (1) represent the unit cost (marginal cost), to raise the level of the effect of promotion and loyalty programming (2) we propose a variable and assume that given the same level of marginal effect, the spending on the promotion program is times that spent on the loyalty program (Blattberg & Deighton 1996). (3) the market share growth rate The objective for the focal brand is to develop a budget allocation plan for loyalty and promotion, while minimizing the overall budget and maintaining market growth rate ( ).

6. Method & Result Table 1. Initial Market Share and Loyalty Effect Adult Milk Powder Market Share Loyalty Effect (SCR) KLIM 0.610.48 FERNLEAF0.390.55 1. The data came from TNS global Taiwan and covered the 12 months of 2009. 2. Excel Solver for nonlinear programming solution and sensitivity analysis is used to seek for the solution. 3. the Objection Function : MIN (BUDGET) to MAINTAIN Market Share Growth Rate and 4. Decision Variable is Budget Growth Rate for Loyalty Program Percentage of Budget Allocation Ratio of Budget Allocation for Promotion and Loyalty Program Effect of Ratio of Effect for Promotion and Loyalty Program Total Budget for Each Period Marke t Share Promotion and Loyalty Programs Promotion Program Loyalty Program Promotion Program Loyalty Program 1N/A 0.55 N/A 0.61 20.860.146.400.660.51 1.28 3.80 0.62 30.860.146.110.660.54 1.22 3.87 0.62 40.850.155.840.670.58 1.17 3.94 0.63 50.850.155.580.680.61 1.12 4.02 0.63 60.840.165.340.690.65 1.07 4.11 0.64 70.840.165.110.700.69 1.02 4.20 0.65 80.830.174.910.710.73 0.98 4.30 0.65 90.830.174.720.730.77 0.94 4.41 0.66 100.820.184.560.750.82 0.91 4.55 0.67 110.820.184.460.770.87 0.89 4.73 0.67 120.820.184.520.830.92 0.90 5.07 0.68 (Periods) Total Budget 46.99 manipulate the growth rate for the loyalty program and solve the optimization model in a dual direction, increasing and decreasing the growth rate by 0.01, plugging in the initial market share and initial loyalty, and seeking an MIN(Total Budget)that maintains the market share growth rate =1.01

7. Table 3. Budget Allocation with Differential Unit Cost of Marginal Effect for Promotion and Loyalty Program s =5=4 Budget Allocatio n Promotio n Program Loyalty Program Promotio n Program Loyalty Program 20.860.1410 30.860.1410 40.850.1510 50.850.1510 60.840.1610 70.840.1610 80.830.1710 90.830.1710 100.820.1810 110.820.1810 120.820.1810 (Periods) Total Budget 46.9838.88

8. Conclusion The primary contribution of this study has been to provide the platform that uses the Markov market share model and the method of sensitivity analysis with spreadsheet to conduct an analysis that illustrates the dynamic interaction between multi- period brand shares and loyalty and promotion effects. A second contribution has been that by manipulating the parameter of the unit cost of marginal effect for promotion and loyalty programs (letting range from 5 to 1), –we found that the greater the value of m, the greater the total budget required to reach the target market share.

9. Conclusion (Cont.) Third, when the differential unit cost of the marginal effect for promotion and loyalty programs is decreased to 4, please refer to Table 3, for =4. The model and methodology proposed in our study indicate this as the turning point at which firms should switch budget spending away from loyalty and focus on the promotion program alone. This interesting result questions the rule that “the cost and effect to acquire a new customer is larger than that to retain a customer.” - in effect calling for halting budget allocation to the loyalty program, instead of the favoured convention to increase it.

10. Future Research We might adopt the marginal diminishing return for the unit cost and marginal effect for promotion and loyalty program instead of linear relationship We might try use the platform to examine and seek to the optimal budget alloication for maximizing the CLV(Customer Lifetime Value) from the Macro perspective instead of micro (individual) perspective as previous did.

11. Appreciate for your kind attention And Q & A