Optimal risk in marketing resource allocation

Abstract

Marketing resource allocation is increasingly based on the optimization of expected returns on investment. If the investment is implemented in a large number of repetitive and relatively independent simple decisions, it is an acceptable method, but risk must be considered otherwise. The Markowitz classical mean-deviation approach to value marketing activities is of limited use when the probability distributions of the returns are asymmetric (a common case in marketing). In this paper we consider a unifying treatment for optimal marketing resource allocation and valuation of marketing investments in risky markets where returns can be asymmetric, using coherent risk measures recently developed in finance. We propose a set of first order conditions for the solution, and present a numerical algorithm for the computation of the optimal plan. We use this approach to design optimal advertisement investments in sales response management