The Cross Nests Flexible Substitution Logit: Uncovering Category Expansion and Share Impacts of Marketing Instruments

Different instruments are relevant for different marketing objectives (category demand expansion or market share stealing). To help brand managers make informed marketing mix decisions, it is essential that marketing mix models appropriately measure the different effects of marketing instruments. Randomly Utility Maximizing (RUM) discrete choice models that have been applied to this problem might not be adequate because they possess the Invariant Proportion of Substitution (IPS) property, which in some situations imposes counter-intuitive restrictions on individual choice behavior. We discuss the theoretical roots of the IPS property, namely, the weak complementarity assumption that underlies RUM models. With the recognition that a set of goods, e.g., goods in a category, can be weak complementary to some common attributes, e.g., total expenditure of marketing instruments in that category, we then derive an alternative choice model specification that relaxes the IPS property at an appropriate level– the “cross nests flexible substitution” logit (CNFSL) model. Our empirical application to prescription writing choices of physicians in the hyperlipidemia category shows that the random coefficient CNFSL model predicts that sales gains from Direct-to-Consumer Advertising (DTCA) and Meeting and Events (M&E) come primarily from the non-drug treatment (82.3% and 59.7% respectively), whereas gains from detailing come at the expense of competing drugs (82.1%). By contrast, the (random coefficient) logit and nested logit model predicts that gains from DTCA, M&E and detailing all would come largely from competing drugs – a counter-intuitive estimate of the sources of demand gains due to different marketing instruments.