Brand Performance Volatility Arising from Marketing Spending Behavior under Competition

While volatile marketing spending, as opposed to even-level spending, may 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 responsiveness of own marketing spending, and by competitive reactivity. From market response theory, we derive propositions about the influence of these variables on revenue and cash-flow volatility. Based on a broad sample of 99 pharmaceutical brands in four clinical categories and four European countries, the authors test for the empirical relevance of the propositions and assess the magnitude of the different sources of marketinginduced performance volatility. The authors find broad support for the predicted volatility effects. The results suggest that volatile marketing spending may incur negative financial side effects such as greater financing costs or higher opportunity costs of cash holdings. Thus common volatilityincreasing marketing practices such as advertising pulsing may be effective at the top-line, but could turn out to be ineffective after all costs are taken into account.