Dynamic Effectiveness of Advertising and Word of Mouth in Sequential Distribution of New Products

Firms in many industries release new products in sequential stages. They also launch separate advertising campaigns at each distribution stage. Thus, communication mix elements—advertising and word of mouth (WOM)—can play important, distinct, and yet interdependent roles in stimulating new product demand. Their effectiveness may fluctuate within and across stages and spill over from earlier to later stages. Thus, the authors construct a dynamic linear model to study the dynamic effects of advertising and WOM on demand for heterogeneous products across stages. They further apply the model to examine a canonical example, the theater-then-video sequential distribution of motion pictures, and estimate the parameters using Kalman filtering/smoothing and Markov chain Monte Carlo methods. The results show that advertising and WOM exert dynamic, yet diverse, influences on demand for new products. For example, while increased ad spending is more effective at an earlier stage due to repetition wear-in and synergy with WOM, increased WOM activities at a later stage could become more powerful in driving demand. Subsequent optimization exercises suggest that films of varied characteristics can potentially re-allocate their advertising budgets and reap additional revenues.