The impact of intermediate advertising effects on advertising effectiveness and profitability

In this study, we introduce a new approach to measuring the impact of TV advertising on the demand for consumer goods. We combine three data sources (i.e., store-level scanner data, advertising spending data and advertising tracking data) to assess the impact of advertising on demand. We estimate demand by employing a random coefficient logit model that uses aggregate data, in accordance with Berry, Levinsohn & Pakes (1995). We model the effect of advertising on consumer utility by applying an individual goodwill production function that is calibrated based on a firm’s advertising efforts and tracking data. In turn, the tracking data assess individual responses to various measures of intermediate advertising effects which are related to consumers’ product experiences, advertising knowledge and appreciation of advertising. These intermediate advertising effects help to improve researchers’ ability to identify the goodwill production function and to estimate the effects of advertising on sales via goodwill. Our empirical findings show indeed that experience, cognition and the appreciation of advertising significantly influence goodwill production and advertising effectiveness. In other words, these factors determine how a company’s advertising strategy ∗Address: Grueneburgplatz 1, 60323 Frankfurt am Main, Germany, telephone: ++49-69-798-34648, email: [email protected]. †Address: Grueneburgplatz 1, 60323 Frankfurt am Main, Germany, telephone: ++49-69-798-34642, email: [email protected].