Marketing Spending and the Volatility of Revenues and Cash Flows

While effective marketing spending is known to improve a brand’s financial performance, it can also increase the volatility of performance, which is not a desirable outcome. This paper analyzes how revenue and cash-flow volatility are influenced by own and competitive marketing spending volatility, by the level of marketing spending, by the effectiveness of own and competitive marketing spending, and by competitive reactivity. We develop hypotheses about the influence of these variables on revenue and cash-flow volatility that are rooted in market response theory. Based on a broad sample of 99 pharmaceutical brands in four clinical categories and four European countries, we test these hypotheses and assess the magnitude of the different sources of marketing-induced performance volatility. The results show that marketing spending policies have an impact on the level as well as the volatility of revenues and cash flows. Such performance volatility may incur negative financial side effects such as greater financing costs or higher opportunity costs of cash holdings. Our results offer new and surprising insights, as we demonstrate that common volatilityincreasing marketing practices such as advertising pulsing are effective at the top-line, but may turn out to be ineffective at the bottom-line.