Dynamic Marketing Resource Allocation for Long-Term Profitability: A Pharmaceutical Application

Marketing Science 29.5 (2010): 909-924

39 Pages Posted: 5 Jun 2008 Last revised: 8 Nov 2016

See all articles by Ricardo Montoya

Ricardo Montoya

University of Chile - Industrial Engineering

Oded Netzer

Columbia Business School - Marketing

Kamel Jedidi

Columbia Business School - Marketing

Date Written: October 15, 2008

Abstract

The ability to identify customers' dynamics and its drivers present an opportunity for firms to optimize their marketing resource allocation and increase long-run profitability. Accordingly, we address the following managerial questions in this research: (1) how can firms dynamically segment their customer base? (2) what are the short- and long-term effects of marketing activities? and (3) how should firms allocate and target their marketing resources to maximize long-term profitability? To address these questions, we propose a non-homogeneous hidden Markov model that captures the dynamics in customer behavior and the enduring effect of marketing actions. To optimally allocate marketing activities, we formulate a dynamic programming approach which takes into account the evolution of customers' behavior. We apply the model in the context of pharmaceutical marketing. We identify three prescription-behavior states, a high degree of physicians' dynamics, and substantial long-term effects for detailing and sampling. We find that detailing is most effective as an acquisition tool, whereas sampling is most effective as a retention tool. Our dynamic marketing allocation approach suggests that the firm could increase its pro¿ts substantially, while decreasing its marketing efforts. Our integrative framework provides important implications for dynamically managing customers and maximizing long-run profitability.

Keywords: marketing resource allocation, long-term effect of marketing activities, hidden Markov model, Bayesian estimation, dynamic programming, pharmaceutical marketing

Suggested Citation

Montoya, Ricardo and Netzer, Oded and Jedidi, Kamel, Dynamic Marketing Resource Allocation for Long-Term Profitability: A Pharmaceutical Application (October 15, 2008). Marketing Science 29.5 (2010): 909-924. Available at SSRN: https://ssrn.com/abstract=1140900 or http://dx.doi.org/10.2139/ssrn.1140900

Ricardo Montoya (Contact Author)

University of Chile - Industrial Engineering ( email )

República 701
Santiago
Chile

Oded Netzer

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Kamel Jedidi

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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