Why Does Advertising Effectiveness vary by Store Format within a DMA?

Abstract

Business managers target different designated market areas (DMAs) with different levels of advertising and seek to understand how the effectiveness of advertising varies across different areas. One interesting puzzle is that when the advertising spending per week and the associated advertising strategy are fixed for a given DMA, why does advertising effectiveness vary by store type within a DMA? This study is the first to explore reasons for such variation in advertising effectiveness within a DMA. We consider potential factors such as store size, 'draw' of customers for a given store type, store characteristics, and product characteristics to explain spatial variation in advertising elasticity within the Chicago DMA. Using scanner data in the soup category, we find significantly higher advertising effectiveness in grocery stores relative to drug stores and mass merchandizing stores, even after controlling for the above factors. We posit that the notion of ‘destination category’ might explain why ad effects are stronger in one store format. To test the idea, we re-estimate the model in the cough syrup category and find that drug stores have a higher ad effect than the other two formats after controlling for other factors.

Keywords: Advertising effects, hierarchical model, store format, ridge regression