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pradeep 2009

pradeep 2009

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 Journal of Marketing Research
Vol. XLVI (April 2009), 207–221207©2009, American Marketing AssociationISSN: 0022-2437 (print), 1547-7193 (electronic)*Xiaojing Dong is Assistant Professor of Marketing, Leavey School of Business, Santa Clara University (e-mail: xdong1@scu.edu). Puneet Man-chanda is Associate Professor of Marketing, Ross School of Business,University of Michigan (e-mail: pmanchan@bus.umich.edu). Pradeep K.Chintagunta is Robert Law Professor of Marketing, Graduate School of Business, University of Chicago (e-mail: pradeep.chintagunta@ChicagoGSB.edu). Chintagunta thanks the Kilts Center for its financial support.The authors thank the two anonymous
 JMR
reviewers, the reviewers of theClayton MSI Doctoral Dissertation Proposal competition, Frank Koppel-man, Abel Jeuland, Sridhar Narayanan, Gary Russell, Ying Xie, HarikeshNair, Vaneet Sethi, and ImpactRx for providing the data. Michel Wedelserved as associate editor for this article.
XIAOJINGDONG, PUNEET MANCHANDA, and PRADEEP K.CHINTAGUNTA*
The authors develop a method to quantify the benefits of individual-level targeting when the data reflect firm strategic behavior—that is,when firms (1) are engaged in targeting and (2) take into account theactions of competing firms.This article studies a pharmaceutical firm’sdecision on the allocation of detailing visits across individual physicians.For this analysis, the authors develop, at the individual level, a model ofprescriptions and a model of detailing.Using physician panel data, theyestimate, at the physician level, the parameters of the prescription anddetailing models jointly using full-information Bayesian methods.Theresults suggest that accounting for firm strategic behavior improvesprofitability by 14%–23% compared with segment-level targeting.Inaddition, ignoring firm strategic behavior underestimates the benefit ofindividual-level targeting significantly.The authors provide reasons forthis finding.They also carry out several robustness checks to test thevalidity of the modeling assumptions.
Keywords 
:target marketing, structural models, pharmaceutical industry,hierarchical Bayesian models, Markov chain Monte Carlomethods
Quantifying the Benefits of Individual-LevelTargeting in the Presence of Firm StrategicBehavior
Targeting(i.e., setting marketing policy differentially fordifferent customers or segments) is an important marketingpractice. Previous literature has documented that there arepositive returns to targeting in various marketing domains.The beginnings of this literature can be attributed to theseminal work of Rossi, McCulloch, and Allenby (1996),who first demonstrated the value of targeting using couponsin the packaged goods industry. Other research then showedsimilar results across other domains, such as direct mail(e.g., Allenby, Leone, and Jen 1999; Bult and Wansbeek 1995; Gonul and Shi 1998; Kim et al. 2005), pharmaceuti-cal marketing (e.g., Manchanda and Chintagunta 2004),and Internet marketing (e.g., Ansari and Mela 2003; Man-chanda et al. 2006; Montgomery 2000; Murthi and Sarkar2003). Typically, these studies calibrated a response modeland used the variation in response parameter estimates(e.g., the effects of prices on brand choices) across cross-sectional units (e.g., segments) to propose a targeting policyfor a marketing instrument (e.g., coupons). To quantify thebenefits of targeting, research can then compare a firm’sprofits under various targeting schemes—at the individualcustomer level, at the segment level, or through mass mar-keting (i.e., no targeting).In many industries (e.g., business-to-business markets)firms already have targeting strategies in place and deter-mine their levels of marketing actions using knowledgeabout their customers’responses and competitors’actions(systematic or otherwise). As many studies have pointedout (e.g., Chintagunta 2001), if the data reflect such strate-gic behavior, ignoring the endogeneity of marketing actionswill lead to incorrect estimates of response parameters and,consequently, to biased inferences regarding the benefitsfrom targeting. Our objective in this article is to quantifythe benefits of targeting while accounting for firm strategic
 
208JOURNAL OF MARKETING RESEARCH, APRIL 2009
1
In the literature, “targeting” sometimes refers to the decision whetherto market to a customer. This is nested in our definition; that is, a customernot chosen as part of the target will receive no marketing resources.
2
The state of practice for a drug category could involve a cruder form of targeting. Our proposed approach will still be valid as long as the parame-ter estimation accounts for the appropriate nature of such targeting behav-ior. In our empirical example, the assumption of one-to-one marketingseems reasonable because firms have access to detailed physician-leveldata and the nature of decision making described previously. We discussother targeting scenarios in detail in the subsequent sections.
behavior.
1
In particular, we are interested in quantifying theimprovement in profits to a firm when it targets activities atthe individual customer level (one-to-one marketing) com-pared with the allocation of marketing resources at a moreaggregate level (e.g., segment or market level), while it alsoconsiders competitive response. Specifically, we use datafrom firms that already use some knowledge about theircustomers’responses and competitors’actions to set theirmarketing policy.Our research domain is the pharmaceutical industry. Weconcentrate on the major marketing instrument used in thisindustry—detailing (i.e., personal sales calls to the physi-cians). Thus, a major difference between this research andthe prior literature on targeting that emphasizes price-related marketing instruments is our focus on detailing,which is a nonprice instrument. The pharmaceutical firm’skey decision with respect to detailing is the allocation of detailing visits across individual physicians. In this indus-try, firms are engaged in one-to-one marketing at the physi-cian level. In addition, firms already use the information onhow detailing affects individual physician behavior and thebehavior of rival firms in setting their detailing allocations.The detailing-setting process works as follows: First, forthe period of interest (usually a quarter), firms set detailingat the physician decile (or segment level), in which thedecile-binning rule is total volume prescribed in the cate-gory. All physicians in the same decile are expected toreceive identical levels of detailing. Second, the firm devel-ops a “calling” plan for eachphysician. This plan is thencommunicated to the field force, which consists of territorymanagers and salespeople. The field force then implementsthe detailing plan. In reality, the field force has some free-dom to make adjustments to the communicated plans to tai-lor the detailing to each physician. Thus, the realized num-ber of details received by each physician is a “hybrid” of top-down (firm calling plan) and bottom-up (local fieldforce adjustments) approaches. Quantifying the benefits of targeting is critical to pharmaceutical companies that investbillions of dollars in detailing with nonnegligible costsassociated with targeting at the physician level. This quan-tification also provides firms an upper bound on the invest-ment they should be willing to make to implement a finertargeting scheme (i.e., at the individual level) relative to acruder one (e.g., at the segment or market level).
2
To carry out our analysis, we need two building blocks.The first is a response model that relates the level of indi-vidual physician detailing to the number of prescriptionsthat physician writes. The response model needs to reflectthe heterogeneity across physicians in their response todetailing—the underlying basis for profitable targeting. Ourresponse model builds on previous literature (e.g., Man-chanda and Chintagunta 2004). The second key buildingblock is the data-generating mechanism for the observed
3
An alternative approach to accounting for strategic behavior whileremaining agnostic about the firm’s detailing decision rule would be to useinstrumental variables to “proxy” for the detailing variable. An idealinstrumental variable would vary across physicians and periods, but identi-fying one is a nontrivial task.
detailing in the marketplace. In line with Shaffer and Zhang(1995), we assume that the physician-level detailing foreach firm observed in the data is the joint outcome of allfirms acting simultaneously to maximize their profits fromeach individual physician, given our response model. Usingthe profit maximization assumption and the prescriptionmodel, we specify a model of detailing at the individualphysician level for all firms in the market. By allowing eachfirm to target physicians with their profit-maximizingdetailing levels, with all firms in the market doing so jointly, our model structure enables us to incorporate afirm’s strategic behavior with respect to detailing explicitlyin the analysis.
3
Note that this approach differs from thatwhich Manchanda, Rossi, and Chintagunta (2004) propose,in which firms set detailing levels using a heuristic thatdepends on the individual physician’s own (i.e., notcompetitive) response parameters.With these two main building blocks—that is, a prescrip-tion response model and a strategic detailing equation—weestimate the model parameters using novel data that containphysician-level prescriptions and detailing levels for all themain drugs in an ethical drug product category. We estimatethe parameters of this system jointly using full-informationBayesian methods to obtain efficient estimates of the modelparameters at the individual physician level. Bayesianmethods are particularly well suited in the current contextbecause individual-level estimates are crucial for imple-menting a one-to-one marketing policy.To quantify the benefits of targeting, we compute thefirms’profit differential under alternative targeting scenar-ios. The “base case” is the individual physician-level target-ing scenario. Then, we obtain the profits under alternativescenarios by computing prescriptions and levels of detailingunder those scenarios, but using our estimated modelparameters. This approach is similar to the counterfactualsimulations that Chintagunta and colleagues (2006)describe. By computing the profit differentials across thevarious alternative scenarios, we can then quantify thebenefits to the firms from individual physician-level target-ing relative to more aggregate allocation mechanisms.Having quantified the benefits to targeting whileaccounting for the manner in which firms set their detailinglevels, we address the following question: What is theimpact on our profit differential metric (which we use toquantify the benefits of targeting) if we ignore firms’strate-gic behavior when estimating the model parameters? Here,we can demonstrate how the benefits to targeting may beincorrectly quantified if such behavior is not accounted forin the estimation. We also provide reasons for our findings.Finally, we estimate a series of alternative models (e.g., Isthe profit maximization objective at the physician levelmore or less appropriate than alternative objective functionssuch as sales maximization?) to ensure that our results arerobust to model specification and estimation.Substantively, our research contributes to the targetingliterature along the following dimensions: First, this is thefirst empirical study to consider competitive responses in
 
Quantifying the Benefits of Individual-Level Targeting209
4
Increasing interest in this general area is also reflected in articles suchas that of Pancras and Sudhir (2007), who focus on vendors’strategies of personalizing services.
5
A plausible alternative specification, with quarterly data such as thoseavailable to us, is an aggregate share model such as the logit. Operational-izing this model would require knowledge of the total patient pool of eachphysician for which a prescription is not written. However, this informa-tion is not available to us. Another possibility that does not require the
evaluating targeting schemes. Second, the theoretical litera-ture on targeting of advertising has found that the ability todo so increases the equilibrium profits of firms (Iyer,Soberman, and Villas-Boas 2005). In our analysis, the firmsare competing using detailing (which is essentially adver-tising). Our results not only provide empirical support forthese theoretical findings but also quantify the increases insuch profits (using data from the pharmaceutical industry).Third, our study extends and complements the current lit-erature on the analysis of physician prescription behavior.As Manchanda and Chintagunta (2004) note, the two majorlimitations of the majority of the current literature analyz-ing physician prescription behavior are that competitivedetailing is not explicitly controlled for and that the processby which sales force effort is allocated is not modeled. Ourapproach explicitly overcomes these two limitations.We can summarize the methodological contributions of our research as follows: The recent literature in marketingand economics that has estimated the parameters of demandmodels while explicitly accounting for firms’behavior hastypically examined strategic behavior at an aggregate level(e.g., Besanko, Gupta, and Jain 1998; Sudhir 2001), thoughthe demand model parameters can be estimated at either theindividual level (Chintagunta, Dubé, and Goh 2005; Yang,Chen, and Allenby 2003) or the aggregate level (Berry1994; Berry, Levinsohn, and Pakes 1995; Nevo 2001). Incontrast, our study examines targeting, with both the pre-scription model and the firms’detailing model pertaining tothe individual physician for whom the targeting is beingundertaken. Furthermore, the data are at the level of aggre-gation of interest. In addition, we can exploit the power of the Bayesian estimation machinery given our interest inindividual-level parameters that are required for addressingthe targeting problem. In this regard, our study can beviewed as an early attempt to estimate a system of demandand firm behavior at the micro level to address an issue(i.e., targeting) that is relevant for that level of aggregation.
4
 MODEL DEVELOPMENT 
As noted previously, our proposed approach has two keybuilding blocks: a model of individual physician-level pre-scription behavior and a model of the firms’strategic detail-ing decision for each physician. Because firms decide thenumber of detail calls for each physician quarter, we spec-ify both these models at the quarterly time interval. Theprescription model describes an individual physician’s pre-scriptions in response to details received from the phar-maceutical firms in each quarter of the year. The detailingmodel assumes that firms follow a profit maximization rulewhen setting their detailing levels for each physician ineach quarter.
 Individual Physician-Level Prescription Model
Given the integer nature of the number of prescriptions,we use a Poisson regression model to characterize physi-cians’prescriptions in response to detailing.
5
Conditional
“noprescription” option data is a hybrid model, with a model for total pre-scriptions across all drugs in the category combined with a share model foreach of the brands in that category. Because the total number of prescrip-tions will be a count, we need to use a count model regardless. By using abrand-level count model as in Equation 1, we can specify a flexible andunconstrained pattern of cross-brand detailing elasticities and estimatethese at the physician level.
on detailing, we assume that the number of prescriptions byeach physician in each quarter follows a Poisson distribu-tion, with parameter
λ
pbt
for physician p, brand b, andquarter t:where rx denotes the number of prescriptions and y denotesits value. Because
λ
pbt
should be positive for all p, b, and t,we use a typical log-link function, denoted as
λ
pbt
=exp(u
pbt
), where u
pbt
is linear in parameters; that is,
(2)u
pbt
=
β
pb0
+
β
pbb
f(dtl
pbt
)++
β
pbl
log(rx
pbt
)+
ξ
pbt
.
In this specification, the intercept represents the specificeffect for physician p and brand b, such as the size of prac-tice for physician p and the physician’s intrinsic preferencefor brand b. We estimate the individual-specific effect fromthe hierarchical model:
(3)
β
pb0
=
θ
b0
+ Z
θ
b1
+
 ν
pb
,
where
θ
b0
and
θ
b1
are the parameters to be estimated, Zrepresents cross-sectional differences across physicians thataffect the mean level of demand, and
 ν
p
= {
 ν
pb
} for
b is arandom variable following a normal distribution N(0,
Σ
 ν
),with zero mean and covariance matrix
Σ
 ν
to be estimated.In Equation 2, f(dtl
pbt
) is a transformation of own detail-ing that captures potentially nonlinear effects of detailing(typically, diminishing returns; see Gonul et al. 2001; Man-chanda and Chintagunta 2004), and f(·) is operationalizedas a log-reciprocal transformation (Lilien, Rao, and Kalish1981)—that is, f(dtl
pbt
)= [1/(1+ dtl
pbt
)]. In this specifica-tion, detailing in the data, dtl
pbt
, is incremented by onebefore the reciprocal transformation to accommodate no(zero) detailing in a physician quarter for a brand. Weexpect that
β
pbb
< 0. Note that the log-reciprocal transfor-mation is flexible in that it allows either increasing ordiminishing returns based on the parameter estimates andthe range of data for dtl
pbt
.The next component in Equation 2 is
Σ
b
′ ≠
b
β
pb,b
f(dtl
pb
t
),which describes the competitive detailing effect correspon-ding to each competitor in the same category. We use thesame functional form as that for the own detailing effect—that is, f(dtl
pb
t
)= [1/(1+ dtl
pb
t
)],
b
′ ≠
b. We expect that
β
pbb
> 0. Note that we allow competitive detailing effectsto be different across brands. This allows for flexiblecompetitive brand effects. The number of estimated detail-ing parameters for our product category with four brands is16 (one own-effect and three cross-effect parameters foreach brand). The term log(rx
pbt– 1
+ 1) is a logarithm trans-formation of the number of prescriptions written during theprevious quarter t– 1 by physician p for brand b. Again, weadd one to the lagged variable rx
pbt– 1
to allow for zero val-
β
pbbpbtbb
fdtl
,
( )
()exp!,1probrxyy
pbtpbtpbty
=
( )
=
( )
×λ λ

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