Uphill or Downhill

Companies know the amount of profit they make, but may not know whether they are operating on the uphill side or downhill side of the profit function with respect to each marketing investment variable. We first identify the risks of an uphill-located firm acting as if it were a downhill-located firm. Then, we develop a diagnostic tool to infer a company’s type based on its location on the profit function and to offer guidance for driving it to the neighborhood of the maximum profit. Next, applying the proposed approach to daily newspaper industry data, we analyze the allocation behavior of companies with respect to three marketing efforts: investments in quality, distribution, and advertising sales effort. We find that a majority of the companies are located near the optimal level of spending for quality, which is a surprising finding given that previous studies have characterized marketing managers as over-spenders. In fact, when managers are sub-optimal, they are much more likely to be under-spending than over-spending. In other words, newspaper companies are clustered on the uphill side of the profit function. In addition, we provide sales elasticity estimates with respect to quality, personal selling effort and distribution investments, which are sparsely available in the extant literature (compared to price and media advertising elasticities). Finally, we furnish normative and empirical analyses of marketing resource allocation in a dual revenues market with possibly interrelated demands for subscriptions and advertising space.