Account-level modeling for trade promotion: An application of a constrained parameter hierarchical model

We consider the problem of utilizing data at the retail/market level on sal es and marketing mix variables to help manufacturers optimize the allocatio n of trade promotional budgets across areas. Major consumer packaged goods manufacturers budget at least one-half of their total marketing expenses to trade promotions. Trade promotional deals are designed to encourage retail ers to promote products by temporarily reducing the price, putting them in in-store displays, or advertising in local media. A profit-based trade prom otional allocation system will require estimates of the responsiveness of s ales at each retailer to a given promotion. A major barrier to the use of r etailer data is the proliferation of incorrectly signed coefficients in sta ndard least squares analyses. Even more sophisticated adaptive shrinkage me thods will not remove the problem of improper signs. We propose a hierarchi cal model to modeling retailer response that uses a first-stage prior with inequality constraints on the regression coefficients. We demonstrate the u sefulness of our modeling approach with data on more than 75 retailers. We find substantial profit opportunities from our response-based promotional a llocation scheme over and above what might be achieved by a standard volume -oriented allocation scheme.