Does Current Advertising Cause Future Sales? Evidence from the Direct Mail Industry

We present findings from a large-scale field experiment that allows us to study whether there is a causal relationship between current advertising and future sales. The experimental design overcomes limitations that have affected previous investigations of this issue. We find that current advertising does affect future sales but the sign of the effect varies depending on the customers targeted. For the firm’s best customers the long-run effect of increases in current advertising is actually negative, while for other customers the effect is positive. We argue that these outcomes reflect two competing effects: brand-switching and inter-temporal substitution. Furthermore, our data suggest a way to distinguish between the informative and persuasive roles of advertising, providing insight into the mechanism by which advertising differentially affects various customer subsets. Acknowledgements: We thank seminar participants at Georgia Institute of Technology, MIT, Northwestern University, Purdue University, University of Connecticut, University of Maryland, University of Pennsylvania, University of Southern California, 2004 Workshop on Information System and Economics, 2005 Symposium on Electronic Commerce Research, Fifth Annual INFORMS Revenue Management and Pricing Conference. Generous funding was provided by MIT Center for eBusiness. Does Current Advertising Cause Future Sales? Page 1