Marketing Spending Models - Innovation and Marketing in the Pharmaceutical Industry - page 553

19.1.4 Overview of the Chapter

Marketing scholars have been dealing with pharmaceutical spending issues for
a long time (e.g., Caplow and Raymond 1954 ; Montgomery and Silk 1972 ).
The interest, partly driven by broader availability of data, considerably increased
over the last years producing a literature rich of modeling approaches and empirical
findings. The objective of this chapter is to review and synthesize this literature. My
focus is on spending models. Given that sales force expenditures represent the larg-
est bulk of marketing expenditures, a host of decision problems is associated with
finding the optimal structure and incentive system for the sales force. Firms have to
determine the optimal size of its sales force, the optimal size of territories and effec-
tive compensation plans. At the level of the individual salesman, for example, deci-
sions on the optimal trip length and sequence of trips have to be made. All these
issues are well-known classical communication planning problems (Skiera and
Albers 2008 ). Since the literature on pharmaceutical sales force models is very rich,
it deserves a special attention, so that I will not discuss these approaches here.
In the following, I will first look at how marketing managers in the pharmaceuti-
cal industry actually arrive at spending decisions (Sect. 19.2 ). In Sect. 19.3 , I dis-
cuss models that describe how pharmaceutical demand responds to marketing
expenditures. This section also summarizes findings on the responsiveness and prof-
itability (ROI) of various spending categories. Section 19.4 turns the focus on nor-
mative applications of marketing spending models. It covers static and dynamic
optimization approaches. Finally, I will identify fields of promising future research
from the synthesis of the extant literature in Sect. 19.5 .

19.2 Rules and Patterns of Pharmaceutical Spending

Marketing budgeting issues are discussed in common textbooks of marketing (e.g.,
Kotler and Armstrong 2010 ). Theory suggests that marketing budgets should be set
at a level where incremental profits equal the incremental budget increase (Mantrala
2002 ). Unfortunately, the required marginal effect of a budget change is not that
easy to obtain. It depends on the type of market response and the structure of the
optimization problem (dynamics in demand and supply, portfolio effects, budget
restrictions, etc.). In addition, data availability is limited and model estimation
introduces uncertainty just due to the sampling error. For these and other difficul-
ties, firms use simplified, heuristic rules of budget setting, e.g., percentage-of-sales
rule and competitive parity rule. There is, however, no guarantee that the application
of these rules leads to optimal results. They are rather expected to result into subop-
timal decisions and a significant waste of resources (Mantrala 2002 ). In Sect. 19.4 ,
I shall discuss normative spending models, which try to overcome these severe limi-
tations, in more detail.