Consumer Behaviour and Optimal Advertising

Author(s): Bertil Nslund

Source: The Journal of the Operational Research Society, Vol. 30, No. 3 (Mar., 1979), pp. 237-243
Published by: Palgrave Macmillan Journals on behalf of the Operational Research Society
Stable URL: http://www.jstor.org/stable/3009604
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J. OpI Res. Soc. Vol. 30. 3. pp. 237-243

Pergoimon Press Ltd 1979. Printed in Great Britain
co Operational Research SocietY Ltd

0030-3623/79/0301-0237S02.00/0

Consumer Behaviour and Optimal Advertising

BERTIL NASLUND
Stockholm School of Economics, Box 6051, S-113 83, Stockholm, Sweden
Using Nicosia's formulation of consumer behaviour, optimal advertising strategies are derived. Other
studies, using empirical data, have shown that advertising should be concentrated at the early
part of the product life cycle and the paper discusses what assumptions about consumer behaviour
must be made to obtain that results. Specifically, it is shown under what conditions pulsing advertising campaigns are optimal.

INTRODUCTION
MANY OF the more complex marketing models"2 use a description of the consumer
based upon his movement through several stages such as need arousal, search for information, evaluation, and purchase decision.
Recently, Aaker,3 in evaluating the application of management science on marketing,
stated:
"However the rather recent development of ambitious theories of buyer behaviour
has really forced model builders to consider models containing several endogenous
variables and systems of equations (Nicosia; Engel et al; and Howard and Seth).
This type of pressure from theorists presents a healthy challenge for model builders
and empirical researchers and foretells a new wave of model development (Nicosia
and Rosenberg)."

The ideas behind some of these theoretical models have been used by firms in the
development of models to be used by the marketing manager for current marketing
decisions (e.g. ref. 4). Often these use linear systems of difference or differential equations
containing endogenous variables such as attitude, intention to buy (motivation), or sales
(market share). An example of such a model will be given in the next section.
So far these models have been used mainly to study things such as the effects on
sales of changing the amount spent on advertising, or to predict the effects of advertising
on attitudes (when the effects go down, one has an indication that something must
be done to the advertising campaign).
Here we shall use the description of the consumer made in these models to derive
optimal marketing strategies.
In deriving optimal advertising strategies we shall devote special attention to a problem of special interest in marketing, viz. to find those behavioural variables which would
explain the type of pulsing advertising campaigns observed in reality, where advertising
goes on over a period, then stops for a while, then comes back, etc. (see Sasieni5):
"Since many people believe that there are circumstances in which a cyclic or pulsing strategy can be optimal it should be possible to discover a class of response
functions whose parameters can be specialized to yield a cyclic policy."
In deriving optimal strategies we shall be using modern control theory. This has
previously been done in other marketing contexts by, for example, Jacquemin,6 who
has extended the Nerlove-Arrow theorem regarding the joint determination of prices
and the advertising budget. He uses demand functions and specifies the optimal advertising budget as a function of elasticities. One conclusion of this research is that it is,
as a rule, optimal to advertise early during the life of a product.
Other authors, e.g. Bensoussan et al.7 and Sethi8 have used empirical research by
Vidale and Wolfe9 (this research does not explicitly use the theory of consumer behaviour discussed above) to derive optimal advertising policies. There is also evidence in

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Journal of the Operational Research Society Vol. 30, No. 3

this research that it is optimal to concentrate advertising early during the life of the
product.
THE MODEL
In the following description of the consumer model which closely resembles the one
given in Nicosia,2 let: x1(t) be the units sold, x2(t) be the consumer attitude, x3(t) be
the consumer motivation, v(t) be the advertising, 0 ? v(t) A v-,p be the price of product
(assumed to be constant) net of unit costs not considering advertising costs, i be the
rate of interest, a, b, c, m, oX,/ be known constants, Tbe the planning horizon.
The horizon over which companies plan vary for different reasons (type of product,
size of enterprise capital omitted, etc.). The type' of planning considered here with
detailed budget specifications for advertising seldom has an horizon exceeding 5 years.
The three variables are dynamically related in the following way: The rate of change
of consumer purchasing is high if motivation is high but low if the level of purchasing
is high. The exact form is assumed to be

1(t)= b[x3(t)

3xl(t)].

(1)

Motivation is taken to be proportional to the attitude

X3(t) =

MX2(t)-

(2)

The rate of change of the attitude is high if purchasing is high, low if the attitude
level is high and high if advertising is high. The exact form is taken to be
-2(t

= a[xl(t)

-0Cx2(t)]

+ cv.

(3)

We assume that the life cycle Tof the product is known710 and that expenses associated
with the product have no value at the end of the period T Since the price and unit
cost are constant we can formulate the following objective. There are no constraints
on the terminal values of x, and x2; x1(T) and x2(T) are varied in the optimization
undertaken in the Appendix).
rT

Max

v) e-itdt.

(px1 -

(4)

The state equations are (1) and (3) which we can write as follows:

1 = b(mx2

flx)

x2 = a(xl - ax2) + cv.

(5)
(6)

The control is constrained by (e.g. budget limit see Harwood" and Kotler12)
0? v

t-.

(7)

We impose no other constraints except that we have to check afterwards that x, > 0.

DISCUSSION OF THE RESULTS

From the Appendix, we obtain the following solution to our problem. The adjoint variable or shadow price associated with (6) is P2. Define
p2 =HI2e

it-

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(8)

B. Naslund Consumer Behaviour and Optimal Advertising

In equation (A8) of the Appendix we obtain the following solution for
12

R exp[(z, + Z2)t] + S exp[(z

H2:

Z2)t] + k,

(9)

where

kexp

-k exp[(z2

ZI =

oca+ fib + 2i
2
22

Z2

[-(z,

+ z2)T](z2

Z)

2z,

z1)T](z1 + Z2)
2z,

L0(2a-fb?

+ 4bma ]

pbm
aoc3b+ ocai+ fibi +

i2 -

abm

The optimal advertising policy is determined by the following necessary conditions (see
Appendix):
H2 > 1/c then v = v
(10)
H2

<

1/c then v = 0

H2 = 1/c

(11)

then v is undetermined.

In all interesting situations we have that z1 > 0 and

(a) If z1

< Z2

(b) If z1

> Z2

(c) If z1 = Z2

(12)

Z2 > 0-

then R is negative, S is positive and k is negative.

then R is negative, S is negative and k is positive.
then R = 0, S is negative and k is infinite.

The effect of advertising on attitude should as a rule be positive'3 thus c(t) > 0.
In order to have any advertising at all we must have that
H2 > 1/c.
In case (a), H2 is negative over 0-T and there will be no advertising. In situation (b),
advertising (if done at all) should be carried out early during the life of the product,
as is shown in Figure 1, where the general forms of c and H2 are shown.
The conclusion regarding case (b) is that advertising should take place between 0
and t*, where t* is determined by
H2(t*)=

(t*)

c(t

O~~~~~~~~H

tX

FIG. 1
O.R.S.

303

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Journal of the Operational Research Society Vol. 30, No. 3

The fact that advertising should be undertaken early during the lifecycle of a product
has been found in other studies.6'7"0
Also, Mickwitz,'4 who studied the effectiveness of various marketing instruments at
different points in the life cycle, found that the best instruments during the early stages
of the life cycle contributed more to sales than the best instruments at later stages.
We can conclude here that if all the parameters oclafibmare non-negative, then advertising should be done early during the life of the product (if it is done at all).
As was mentioned in the Introduction, we are interested in determining conditions
under which an optimal advertising strategy is pulsing. If at least one of a, b, or m
is negative and if
14bmnaI> (oQa- fb)2,

then the solution of the equation for H2 [see equation (9)] can be written

(a +
H2(t)= exp

+
2

) t] [R cos wt + S sin wt].

XC(t)

ti

t2

t3

t4

t5

FIG. 2

This solution is shown in Figure 2. If c is constant' (horizontal dotted line) we see

that if H(O)> 1/c then one starts with continuous advertising, then the pulses start
to follow first in short intervals which later become larger and larger.
If c is a decreasing function of time one obtains a similar type of advertising strategy
though cannot in such a general way predict the length of the intervals.
We have not gone through all possible forms of the solutions of the differential equations for H2. The first solution giving rise to Figure 1 is a very likely one to occur,
given the values one would expect for the various parameters and therefore we are
via this method able to say something about a likely form of an optimal solution.
The second solution was derived for the purpose of answering the question proposed
in the Introduction, namely if one can provide values for the parameters of consumer
models that will make pulsing advertising strategies optimal. As we saw, this requires
that a, b, or m or all three are negative. It is difficult to imagine a situation where
b is negative. Nicosia claims that it is quite possible that m is negative and it is conceivable that a is negative. As was pointed out before, these conditions are only necessary
and we must also check, using real data, that the solution gives non-negative values
for x1.
Considering the case when c(t) declines over time, we find that the firm begins with
advertising; it then stays out during t2t2, runs a campaign during t2t3, etc.
In order to specify the exact form of the optimal policy it is necessary to make
empirical tests to determine the values of the parameters. How such tests canl be done
is suggested in Nicosia.2
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B. Naslund Consumer Behaviour and Optimal Advertising

CONCLUSIONS
We have found that it is possible to use a theory of consumer behaviour to determine
an optimal advertising policy. The exact form of the policy will depend upon the values
of the parameters used in the theory of consumer behaviour. It seems very likely that
the optimal policy is to undertake advertising early in the life of the product.
The method used here makes it possible to specify under what conditions it is optimal
to use pulsing advertising campaigns.

APPENDIX
In the problem of equations (4)-(6) the Lagrangian is
T

v) e tdt

((px-

b(mx2 - fix)] dt

-[

.0
T

a(xl

P2L[22

X2)

cv] dt.

Integrating by parts gives

L

f(pxi

v)e-itdt

+ bflp1)dt +

xl(-fP

plbmx2dt

X2(-

P2

ayp2)

+ Jfcv(t)p2dt

dt

p2ax,

p1(T)k1(T) - p2(T)k2(T).

(Al)

Differentiating (Al) with respect to x1 and X2 and equating to zero gives

pe"it

+ P1-bflpl

p1bm + P2

+ p2a

=0

(A2)

0.

(A3)

+H2a=0

(A4)

ay-p2 =

Substituting
Pi = He-it
P2 =7e-t
we can write (A2) and (A3) as follows:
-(b

p-c?+1

+?i)I?

H1bm + 172 -(a?

(A5)

=0

+ i)2

The integrand of Lis linear in v and we therefore obtain

if

H2>-

thenv =v

then v = 0

(A6)

H2 =

then v is determined.

From (A6) we see that the optimal policy depends upon H2. We therefore solve H2
from (A4) and (A5). Substituting from (A4) in (A5) gives
_"2

bm

+H2(aa

+[

bm

i) +(bf

+ i)f!2

bm

_(acs

+i)(bf

+ i)H2

+ Hn

bm
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0.

(A7

Journal of the Operational Research Society Vol. 30, No. 3

We immediately see that one particular solution is
H72 -

pbm
_abin + aocfjb+ ocai + fibi +

i2

To find the homogenous solution we have to determine the roots of the following
second degree equation
-2

- 2(oa + /3b + 2i) + acab/ + aci + b/3i +

i2 -

abm = 0.

The solution is
L(oa- bf

=ca + /lb + 2i?

+ 4bma

The result is of the following form (see e.g. Kaplan'5):

H2

R exp [(z, + z2)t] + S exp [(z,

z2)t] + k,

(A8)

where k is the particular solution and

ocCa
+ fib + 2i
2

Z1 =

L(oca

Z2=V

flb)2

+ 4bma]

Using (A5) we get

ca +

R exp [(z, + Z2)t]

bm

c~~~a
+ i z1- z, +
z2
+ Z2
S exp [(z,
+oca +
bm

~c~a

z2)t] +

+
bm

k.

(A9)

We know that H1,(T) = 0; H2(T) = 0.

Combining (A8) and (A9) we get at time T
(Z1 + z2)Rexp[(z,

+ z2)T] + (Z2-

z)Sexp[(z,

-z2)T]

0.

(A10)

Combining (A8) and (A10) we obtain

LI

1]Sexp[(z

ZI

+ k =0,

-z2)T]

Z2

and thus
-k exp
S

(1

[(Z2 -

z1)T]

-k exp

[(Z2 -

Z2)

2z,

Z2 -Z)
ZI

z1)T](z1

Z2

and from (A10) we obtain

k exp [-(z1

Z2)

T]

k exp [-(z1

2z2

+ Z2) T] (Z2
2z 1

- Z1)

REFERENCES
'J. A. HOWARD and J. N. SETH (1969) The Theory of Buyer Behaviour. Wiley, New York.
2F. M. NICOSIA (1966) Consumer Decisions Processes. Prentice-Hall, Englewood Cliffs.
3D. A. AAKER (1973) Management science in marketing: the state of the art. Bull. Inst. Mgmt. Sci. 3.
4N. K. DHALLA and S. YUSPEH (1976) Forget the product life cycle concept. Harvard Busin. Rev. 54, 102-112.

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B. Ndslund Consumer Behaviour and Optimal Advertising

5 M. W. SASIENI(1971) Optimal advertising expenditure. Mgtnt Sci. 18, 64-72.
6A. Jf\CQUEMIN(1971) Product differentiation and optimal advertising policy: a dynamic analysis. Res. Rep.
7107, Dept Econ. Univ. Catholique Louvain.
A. BENSOUSSAN,G. HURST and B. NASLUND (1974) ManzagementApplications of Modern Control Theory.
North-Holland, Amsterdam.
8S. P. SETHI (1973) Optimal control of the Vidale-Wolfe advertising model. Ops. Res. 21, 998-1013.
9M. L. VIDALE and H. B. WOLFE (1957) An operations-research study of sales response to advertising.
Ops Res. 5, 370-381.
"0B. NASLUND and B. SELLSTEDT(1972) Optimal marketing policy and life of products. Working Paper,
European Institute for Advanced Studies in Management, Brussels.
" D. L. HURWOOD (1968) How companies set advertising budgets. Conf. Bd Rec. 34-41.
12p. KOTLER(1972) Marketing Management, pp. 666-677. Prentice Hall, Englewood Cliffs.
'3D. H. GENSCH (1973) Advertising Planning. Elsevier, Amsterdam.
14G. MICKWITZ (1959) Marketing and Competition. Societas Scientiarum Fennica. Helsingfors.
"5W. KAPLAN (1959) Advanced calculus. Addison-Wesley, Reading, MA.

243
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