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Marketing Letters 16:1, 19–35, 2005

c 2005 Springer Science + Business Media, Inc. Manufactured in the Netherlands.
Allocating a Promotion Budget between Advertising
and Sales Contest Prizes: An Integrated Marketing
Communications Perspective
PUSHKAR MURTHY pmurthy@epocrates.com
Senior Manager (Analytics), Epocrates Inc, San Mateo, CA 94404
MURALI K. MANTRALA

mantralam@missouri.edu
Professor of Marketing, University of Missouri, 438 Cornell Hall, Columbia, MO 65211
Abstract
This paper develops and analyzes a normative model for allocating a fixed, short-term promotion budget between
product advertising and prizes of a rank-order sales contest for a homogeneous sales force when sales are driven by
both personal selling effort and advertising. The model provides insights into how the optimal budget allocations
vary with the synergy between advertising and selling effort, sales force size, salesperson risk-tolerance, perceived
cost of effort, selling effectiveness and sales response uncertainty. The analysis highlights the need for and value
of close coordination between marketing and sales management in designing a promotion program involving both
advertising and sales force incentives.
Keywords: sales contests, advertising, integrated marketing communications, synergy, resource allocation
In many markets today such as financial services or prescription drug sales settings, a firm’s
sales are a function of both advertising and personal selling efforts (e.g., journal and/or DTC
advertising, sampling and detailing in newpharmaceutical product marketing). Such efforts
can have main as well as interaction or synergistic effects as highlighted in the Integrated
Marketing Communications (IMC) literature, e.g., Schultz (1993), Belch and Belch (1998),
Naik and Raman (2003). For example, product advertising can make personal selling more
productive in business markets as demonstrated by Morrill (1970) over three decades ago.
In addition to raising selling effectiveness, advertising can also contribute to higher levels
of selling efficiency (Hutt and Speh, 2004, p. 412). Not surprisingly, companies like IDS
Financial Services utilize a mix of advertising and sales force incentive programs, e.g., sales
contest-based bonuses and memberships in the President’s Advisory Council for top finan-
cial agents, to drive sales (Deighton, 1996). Determining the optimal allocation of a fixed
promotion budget between agent-focused sales incentives and customer-focused advertis-
ing taking into account any synergy between them is then a key decision for companies like
IDS (e.g., Drumwright, 1995). So far, however, no normative model-based solution to this
type of promotion mix resource allocation problem is found in the marketing literature.

Corresponding author.
20 MURTHY AND MANTRALA
Prior research in the labor and personnel economics fields has examined the optimal use
and design of relative performance incentive schemes such as rank-order contests or “tour-
naments” (e.g., Lazear, 1998). Following this work, Kalra and Shi (2001) have investigated
the optimal design of a rank-order contest for a homogeneous sales force. Assuming the
sales outcome is logistically distributed and the contest budget is set high enough, Kalra and
Shi find the total number of winners in a sales contest should not exceed half the number
of contestants. However, under the assumption of uniformly distributed sales, they find a
single-prize “Winner-Take-All” contest is best. Kalra and Shi do not examine the optimal
division of a fixed promotion budget between accompanying advertising and the optimal
contest taking into account their joint effect on sales. Our research pursues this direction.
More specifically, inthis paper we developandanalyze a normative model for determining
the optimal allocation of a fixed, short-term promotion budget between advertising and
prizes of a rank-order sales contest when sales are affected by both personal selling effort
and advertising. The model provides insights into how the optimal advertising allocation
varies with synergy, sales force size, salesperson characteristics such as risk-tolerance,
perceived cost of effort, selling effectiveness, and sales response uncertainty. In this model,
we assume the sales outcome has a Gumbel distribution rather than the logistic or uniform
distributions assumed by Kalra and Shi (2001) and, consequently, some of our results on
prize structure (holding advertising constant) differ from theirs. In particular, under the
assumptions of our model, we find the total number of winners in the contest should not
exceed approximately 63% of the participants. Thus, our work complements as well as
extends Kalra and Shi’s analysis while contributing to the IMC literature.
1. Model Setting and Definitions
Consider a short-term product promotion program by a firm that involves direct advertising
to customers and a rank-order sales contest to stimulate a homogeneous sales force, whose
preferences for income and leisure are known to the firm and to each other, deployed across
a set T of n independent sales territories. More specifically, suppose the sales force is of
size n and the contest has multiple prizes m(≤ n), each of monetary amount B
r
, r ={1, 2,
. . . ., m}. The firm’s level of advertising and contest prize structure are taken to be known
to the salespeople when they decide their selling efforts. The firm’s decision problem is to
allocate a fixed promotion budget P between advertising A, and the contest prize amounts
B
r
(r = 1, 2, . . . , m), taking into account salesperson response to the promotion program.
1.1. Sales Response Model and Probability of Winning the Contest
We assume sales in territory T
i
∈ T are an outcome of salesperson i ’s selling effort x
i
(e.g., hours per period), as well as the firm’s advertising effort (dollars per period), A, and
both the firmand salespeople are equally well-informed about the territories’ uncertain sales
response functions. Specifically, we assume that these sales are comprised of a deterministic
ALLOCATING A PROMOTION BUDGET 21
and a random component which are additively separable, i.e.,
S
i
= R(x
i,
A) +ε
i
(1)
where,
S
i
= Total sales ($) generated over the promotion period in territory T
i
R(x
i
, A) = Deterministic sales response function for T
i
ε
i
= Random error term associated with i th sales territory.
Given (1), note that if Q
i
is the sales performance rank of agent T
i
fromthe top, then his/her
probability of winning the contest (with advertising A held constant) can be expressed as,
Prob(Q
i
= 1) = p(Q
i
= 1)
= p(S
i
≥ S
j
) ∀j ∈ T, j = i
= p(R(x
i
) +ε
i
≥ R(x
j
) +ε
j
) ∀j ∈ T, j = i
= p(ε
j
≤ R(x
i
) − R(x
j
) +ε
i
) ∀j ∈ T, j = i (2)
Hence, the probability of a particular salesperson winning the contest is a function of not
only his/her effort level, but that of the rest of the sales force as well.
1.2. Deterministic Sales Response Specification
Following recent IMC models (e.g., Naik and Raman, 2003), we assume that the determin-
istic sales response function R is given by:
R(x
i
, A) = τ
0

1
· A +τ
2
· x
i

3
· A · x
i
. (3)
where,
τ
0
= Sales revenues when both advertising and selling effort equal zero (τ
0
≥ 0)
τ
1
= Effectiveness of advertising by the firm (τ
1
> 0)
τ
2
= Effectiveness of selling effort (τ
2
> 0)
τ
3
= Effect of interaction between advertising and selling effort (τ
3
≥ 0).
In equation (3), the parameter τ
3
represents the synergy between advertising and personal
selling because their combined impact exceeds the sum of the independent effects when τ
3
> 0 (Naik and Raman, 2003). Next, we define the model assumptions with respect to the
uncertain sales distributions.
1.3. Probability Distribution of Sales
In order to account for extreme values occasionally encountered in territory sales data,
we let the random error term ε
i
be independently and identically Gumbel [Extreme value
22 MURTHY AND MANTRALA
distribution] distributed with scale parameter =µ and location parameter = −γ/µ (where
γ = 0.577. . . is the Euler constant). Such a distribution possesses the following properties,
E(ε
i
) = 0 ∀i ∈ T
var(ε
i
) = π
2
/6µ
2
∀i ∈ T (4)
E(ε
i
ε
j
) = 0 ∀i, j ∈ T, i = j.
The density function for each ε
i
is:
f (ε
i
) = µe
−(µε
i
+γ )
· e
−e
−(µε
i
+γ )
∀i ∈ T. (5)
1.4. Salesperson Utility Function
Following extant models in the sales force compensation literature, we assume that the sales-
person’s net utility function is additively separable in utility of income,U(.), and disutility
of selling effort,V(x),and given by U(.) – V(x). More specifically, following Rao (1990),
we assume salesperson i disutility for effort V(x
i
) to be convex in effort x
i
,and adopt a
quadratic specification for it:
V(x
i
) =
β
2
x
2
i
; where β > 0 is the disutility parameter. (6)
Now, every salesperson has a particular probability for winning a certain prize from which
he/she derives utility. A salesperson’s expected utility is the summation (over all possible
payouts) of the product of the utility derived from a particular payout and the probability
associated with achieving it. The i th salesperson’s net expected utility function can be
expressed as:
E(W
i
) =
m
¸
r=1
p(Q
i
= r) · U(B
r
) − V(x
i
). (7)
Sales representatives may be risk-neutral or risk-averse. The power utility function specifi-
cation, e.g., Basu et al. (1985), captures this behavior, i.e.,
U(B
r
) =
1
δ
(B
r
)
δ
; δ > 0 (8)
where, δ = risk-aversion parameter. For a risk-neutral salesperson δ = 1, while for a risk-
averse salesperson 0 < δ < 1.
2. Salesperson’s Response to the Promotion Program
Following the economic tournament theory perspective (e.g., Lazear, 1998) a salesperson
is assumed to put in a level of effort x

i
that maximizes his/her expected utility subject to
the satisfaction of the minimum utility (participation) constraint, taking into account that
all the other contenders will also be acting to maximize their net utility. That is, salesperson
i ’s problem (M1) is to:
ALLOCATING A PROMOTION BUDGET 23
M1: Maximize
x
i
E(W
i
)
subject to E(W
i
)|
x
i
=x

i
≥ W
min
i
; and
∂ E(W
i
)
∂x
i

x
i
=x

i
= 0 ∀i ∈ T
where,
∂ E(W
i
)
∂x
i
=
m
¸
j =1
U(B
j
) ·
∂p(Q
i
= j )
∂x
i

∂V(x
i
)
∂x
i
. (9)
W
min
i
is the minimum utility of the i th salesperson that needs to be satisfied for him/her
to participate in the contest. Because E(W
i
)is concave and continuously differentiable in
x
i
, and the feasible set of efforts, X, is compact, existence of a Nash equilibrium vector
x*= [x

1
,. . . . . . . . . , x

n
]
T
can be proven using variational inequality theory (Nagurney, 1993).
2.1. Equilibrium Level of Effort
In M1, the equilibrium level of effort that maximizes salesperson expected utility is given
by (please refer to Appendix A for proof):
x

=
µ(τ
2

3
A)

m
¸
r=1
ω
r
· U(B
r
) (10)
where, for the sake of analytical convenience, we have set
ω
r
= 1 −
n−1
¸
k=n−r
1
k +1
. (11)
It is readily apparent from the above that ω
1
> ω
2
>. . .
Equation (10) leads us to three propositions that are important to understanding how the
firm should allocate its limited promotion budget between advertising and contest prizes.
Proposition 1. When there is positive synergy between advertising and selling effort, the
salesperson effort induced by the sales contest increases as the level of advertising A by the
firm increases. Conversely, in the absence of synergy, sales force effort is dependent only
on the contest prize(s) and is independent of the level of advertising by the firm.
Proposition 2. All else equal, the salesperson effort induced by the sales contest will
decrease with (a) increase in sales uncertainty (i.e. decrease in scale parameter, µ); (b) an
increase in salesperson disutility parameter, β; (c) decrease in effectiveness of sales effort,
τ
2
; (d) decrease in synergy, τ
3
.
24 MURTHY AND MANTRALA
2.2. Effort-Maximizing Number of Prizes
The contest may have one or more prizes. Within the context of our model assumptions, the
following proposition establishes the maximum number of prizes for an effort-maximizing
contest (see Appendix B).
Proposition 3. In order to maximize effort, a contest for a homogeneous risk-neutral or
risk-averse sales force should have multiple prizes not exceeding approximately 63% of the
sales force size.
Proof: From (10) we see that the allocated equilibrium effort x

is a linear function of
the utilities obtained from the various prizes. We also see that irrespective of the prize
values, x

increases initially with an increase in the number of prizes m. However, after
a certain number of prizes, the coefficient on the utility obtained from a particular prize
is negative. This implies that x

decreases once a certain number of prizes is exceeded.
Hence, the maximum number of prizes M−1 has to determined such that ω
M
=0 (because
ω
M+1
< 0). Appendix B shows that for a large sales force, M’s ratio to n is about 63%:
i.e., M ∼ n · (
e−1
e
) + 1. For example, for a 100 member salesforce, 63 prizes of 10 value
units each (say) would produce greater salesforce effort than 70 prizes of 10 value units
each.
3. Firm’s Problem
The firm’s problem of allocating a fixed promotion budget P between advertising and the
sales contest is expressed in the following agency-theoretic formulation:
M2: Maximize E(π)
A,B
1
,B
2
,...,B
m
= gnR(x

) − A −
m
¸
j =1
B
j
Subject to:
E(W)|
x=x
∗ ≥ W
min
A +
m
¸
j =1
B
j
≤ P
A ≥ 0, B
j
≥ 0 ∀j
Hereafter, we assume the gross margin g, expressed as a fraction of the selling price, is
constant and, for the sake of expositional convenience, set equal to 1. Below, in Section 3.1
we investigate the solution to the firm’s budget allocation problem (M2) in the special
case when salesperson participation in the contest is guaranteed, i.e., when the required
threshold utility is sufficiently lowenough so that the participation constraint can be ignored.
We consider both risk-neutral and risk-averse sales forces in this analysis. Subsequently, in
Section 3.2, we examine the solution to the firm’s allocation problemwhen the participation
constraint is binding and the sales force is either risk-neutral or risk-averse.
ALLOCATING A PROMOTION BUDGET 25
3.1. Promotion Budget Allocation When Sales Force Participation in Contest
is Guaranteed
3.1.1. Risk-Neutral Sales Force. From (10), the equilibrium level of effort for a risk-
neutral salesperson is:
x

=
µ(τ
2

3
A)

m
¸
r=1
ω
r
· B
r
(12)
where B
r
is the r
th
prize in the sales contest.
When participation is guaranteed, and there is a constraint or limit on the contest budget,
B > 0, it is known that the equilibrium level of effort for a risk-neutral sales force is
maximized when there is a single prize, viz, B
1
= B and B
2
= B
3
= · · · = B
m
= 0
(i.e., a Winner-Take-All form of rank-order contest, see, e.g., Kalra and Shi, 2001). Then,
substituting the expression for the optimal effort (12) given a single prize (i.e., r = 1) of
value B
1
= B = P – A into the firm’s objective function in M2, the optimal advertising
allocation is given by:
A

=
P
3


2

3
+

P
3


2

3

2

(kτ
2
2
−2kτ
2
τ
3
P −τ
1
)
3kτ
2
3
(13)
where,
k =
µω
1

.
It follows that the optimal single contest prize amount is given by B

= P – A

.
As summarized in the following proposition, equation (13) reveals the impact of synergy
on the ratio of advertising to contest budget allocations when the sales response function is
as specified in (3).
Proposition 4. When the sales force is risk-neutral and their participation in the contest
is guaranteed, as synergy (τ
3
) increases from zero with all else remaining constant, the
optimal allocation of the fixed promotional budget P to advertising increases from zero to
2P/3 if τ
1
≤ kτ
2
2
(where k =
µω
1

) or decreases from P to 2P/3 if τ
1
> kτ
2
2
.
Proof: Suppose the synergy parameter τ
3
= 0. Then, the sales response function (3)
reduces to the following:
R(x

, A

) = τ
0

1
· A


2
· x

(14)
Or, upon substituting for x

from (10), and recognizing that B

= P − A

,
R(A

) = τ
0
+

τ
1
−kτ
2
2

· A

+kτ
2
2
P. (15)
It is evident from (15) that the firm will choose to allocate the entire fixed promotion budget
P to advertising (i.e. A

= P, B

= 0) if τ
1
> kτ
2
2
, or to the contest (i.e. A

= 0, B

= P) if
τ
1
≤ τ
2
2
k. However, this “all or nothing” budget allocation to advertising is modified when
26 MURTHY AND MANTRALA
synergy is positive (i.e. τ
3
> 0). More precisely, with other parameter values remaining
constant, as synergy increases from zero, we observe from (13) that:
lim
τ
3
→∞
A

=
2P
3
.
Hence, as the magnitude of synergy becomes larger, the firm should decrease the alloca-
tion to advertising from 100% to two-thirds of the budget when τ
1
> kτ
2
2
or increase the
allocation to advertising from 0% to two-thirds of the promotion budget if τ
1
< kτ
2
2
. Intu-
itively, the optimal budget allocation depends upon the relative effectiveness of advertising
and sales force efforts, i.e., τ
1
versus τ
2
2
k. However, as synergy increases, it is optimal to
increase the budget allocation to the less effective type of promotion effort.
Next, we examine the change in advertising allocation with variation in other sales
response parameters, holding synergy constant at some positive value.
Proposition 5. When the sales force is risk-neutral and participation is guaranteed,
all else remaining constant, the proportion of the fixed promotional budget allocated to
advertising(a) increases withincrease insales force size, n (>2); (b) decreases withdecrease
in sales uncertainty (i.e. increase in scale parameter, µ); (c) increases with increase in
salesperson disutility coefficient, β.
Proof: We re-arrange (13) as follows:
A

=
P
3


2

3
+

P
3


2

3

2

τ
2
2

2
3


2

3

τ
t
3kτ
2
3

. (16)
This implies that an increase in k will decrease A

. Since, k =
µω
1

=
µ

(1 −
1
n
), the results
follow. Further, note that when τ
3
= 0, Proposition 5 applies in a nonmonotonic way, i.e.,
all else remaining constant, there is a threshold value k* = τ
1
/ τ
2
2
such that for k ≤ (>) k*
all of the budget should be allocated to the sales contest (advertising).
3.1.2. Risk-Averse Sales Force. When salespeople are risk-averse, having more than one
prize in the contest stimulates more selling effort (Kalra and Shi, 2001). Within the context
of our model, Proposition 3 establishes the maximum number should be 63% of the sales
force size. Proposition 6 speaks to how the optimal allocations of the promotion budget
change with increasing synergy when salespeople are risk-averse.
Proposition 6. When the sales force is risk-averse and participation is guaranteed,as
synergy (τ
3
) increases from zero with all else remaining constant, the optimal allocation of
the fixed promotional budget (P) to advertising will increase from
P −

kδτ
2
2
τ
1

1/1−δ
to

2
2 +δ

P if P ≤
(2 +δ)
δ

kδτ
2
2
τ
1

1/1−δ.
,
ALLOCATING A PROMOTION BUDGET 27
where
k =
µω
1
nβδ
·

1 +
m
¸
r=2

ω
r
ω
1
1
1−δ

1−δ
,
or decrease from
P −

kδτ
2
2
τ
1

1/1−δ
to

2
2 +δ

P if P >
(2 +δ)
δ

kδτ
2
2
τ
1

1/1−δ
.
Proof: Please refer to Appendix C where it is also shown that the optimal value of the rth
contest prize is given by
B
r
=

ω
1
1−δ
r
¸
m
i =1
ω
1
1−δ
i

B
where
B = P − A

.
It can be seen that Proposition 4 pertaining to the risk-neutral sales force is the special
case of Proposition 6 when δ =1. An important difference, however, is that salesperson
risk-aversion induces positive allocations of the budget to both advertising and the contest
even when there is no synergy.
In the next section we investigate the firm’s optimal promotion budget allocation when
sales force participation in the contest is not guaranteed, and so the firm designs the contest
to ensure that the participation constraint is exactly met.
3.2. Promotion Budget Allocation When Participation Constraint is Binding
In order to ensure that the contest participation constraint is exactly met, the participation
constraint must hold as an equality. Substituting the probability of winning a prize, disutility
of effort (6) and equilibriumeffort level (10) in the expected net utility expression (7) we get:
E(W) =
m
¸
r=1

U(B

r
)
n −r +1


µ
2
2n
2
β
· (τ
2

3
A

)
2
·

m
¸
r=1
ω
r
· U(B

r
)

2
= W
min
. (17)
Equation (17) leads to the following proposition that applies to either a risk-neutral or
risk-averse sales force in the presence of positive synergy.
Proposition 7. When the participation constraint is binding, all else remaining constant,
the firm’s optimal allocation of the fixed promotion budget to advertising increases with
(a) increase in sales uncertainty (i.e., decrease in scale parameter, µ); (b) increase in
salesperson disutility parameter, β; (c) decrease in the effectiveness of selling effort, τ
2
;
(d) decrease in synergy, τ
3
.
28 MURTHY AND MANTRALA
Proof: Proposition 7 follows from Proposition (2). To maintain the equality (17), the firm
must increase its advertising allocation as sales force effort decreases with any of the above
changes in salesperson and sales response parameters.
Next, we examine the impact on the promotion budget allocation of decreasing sales
force risk-aversion (i.e. increasing δ, 0 < δ ≤ 1) when (17) is maintained. Differentiating
(17) with respect to δ we get:
∂ E(W)
∂δ
=

ln δ −
1
δ

· [W
min
− V(x)] (18)
This result leads to the following proposition:
Proposition 8. The firm should increase the allocation of the promotion budget to the
contest as the sales force becomes less risk-averse, i.e., as δ increases.
Proof: From (18) we see that the overall expected net utility declines as δ increases
(assuming the magnitude of the disutility from effort is less than that of the minimum
expected net utility from participation) and, therefore, the allocation of the promotion
budget to the contest must increase to maintain (18). Thus with increasing risk aversion,
the proportion of the budget allocated to advertising increases as well as the contest design
has more winners.
Lastly, we examine the impact of increasing sales force size n when the individual
rationality constraint is exactly satisfied. Differentiating (17) with respect to n we get:
∂ E(W)
∂n
= −
m
¸
r=1
U(B
r
)
(n −r +1)
2

µ
2
n
2
β
· (τ
2

3
A)
2
·

m
¸
r=1
ω
r
· U(B
r
)

(19)
·
¸
m
¸
r=1
U(B
r
)

∂ω
r
∂n

ω
r
n

.
From the first term of (19) we note that the utility from the monetary incentive decreases
as sales force size increases. The impact of an increase in sales force size on the overall
expected net utility and its implications for the allocation of the promotion budget depend,
in general, upon the size and number of the contest prizes. We illustrate using the special
case of a contest with multiple (say m), equal prizes of magnitude b each i.e., a “Multiple
Winners” (MW) contest which is most likely to result in the satisfaction of the individual
rationality constraint, whether the sales force is risk-neutral or risk-averse (Kalra and Shi,
2001). Under a MW contest, (19) becomes:
∂ E(W)
∂n
= −U(b)
m
¸
r=1
1
(n −r +1)
2

µ
2
n
2
β
· (τ
2

3
A)
2
· [U(b)]
2
·

m
¸
r=1
ω
r

·
¸
m
¸
r=1

∂ω
r
∂n

ω
r
n

(20)
ALLOCATING A PROMOTION BUDGET 29
Table 1. Optimal Constrained Budget Allocation to Advertising and Sales Contest: Sum-
mary of Results.
Effect on proportion
Increase in of promotion budget
parameter allocated to advertising
Sales force size Depends on the proportion of contest winners
(if fewer than 63% then increase, else decrease)
Sales uncertainty Increase
Disutility Increase
Risk aversion Increase
Selling effectiveness Decrease
Synergy Depends on initial allocation when synergy was absent
(if initially allocated to contest then increase, else decrease)
Proposition 9. If the firmruns a Multiple Winners contest with the number of prizes mless
(more) than 63% of the sales force size, then it should allocate a greater (lower) proportion
of the promotion budget to advertising as the sales force size increases.
Proof: Following Proposition 3, note that if the number of prizes m < M ∼ n · (
e−1
e
) +1
then the term [
¸
m
r=1
(
∂ω
r
∂n

ω
r
n
)] is negative, making the second term of (20) positive. This
implies that the reduction in incentive utility from the contest is offset by the decreased
disutility from effort (owing to reduced effort on the part of the sales force). Hence, the
individual rationality constraint is satisfied but at a lower level of selling effort as sales
force size increases, calling for the firm to allocate a greater proportion of the promotion
budget to advertising. However, if the number of prizes m were greater than M, then the
term [
¸
m
r=1
(
∂ω
r
∂n

ω
r
n
)] in (20) becomes positive, making the entire second term of (20)
negative. Therefore, the disutility from effort increases (owing to increased effort), and
the individual rationality constraint would not be satisfied. The firm should then allocate a
greater (lower) proportion of the promotion budget to the contest (advertising) as the sales
force size increases.
4. Conclusions
Summary of results: Table 1 summarizes the collective insights across all scenarios (partici-
pation constraint binding or not; risk-neutral and risk-averse salespeople) we have analyzed
in this paper.
Extensions and Future Research Directions: To highlight the role of synergy, our analysis
has assumed a linear rather than the usual concave formof main effect of advertising on sales
response. This is a simplifying but fair assumption in problem settings where the operating
range of advertising effort is constrained by a relatively small promotion budget and sales
response over this limited range is approximately linear. If the main effect were concave,
the “all or nothing” allocation and the parametric conditions under which the advertising
30 MURTHY AND MANTRALA
allocation increases or decreases as synergy increases (Propositions 4 and 6), would be
modified. However, because the optimal selling effort under the contest (equation (10)) is
unaffected by a nonlinearity in the main effect of advertising, Propositions 1–3 will continue
to hold as would the main insights of Propositions 5–9. However, further research on the
effects of response function nonlinearity as well as other complexities such as information
asymmetry and sales force heterogeneity in the advertising-sales contest budget allocation
problem is warranted.
This paper contributes to the marketing science and IMC literatures by offering insights
into the optimal allocation of a fixed promotion budget between advertising and the prizes
of an accompanying rank-order sales contest for a homogeneous sales force. The analy-
sis highlights the need for and value of close coordination between advertising and sales
management in designing integrated sales promotion and incentives programs. The pro-
posed model is implementable and can be utilized to guide advertising plus contest budget
allocation decisions.
Appendix A: Equilibrium Level of Effort
The probability that T
i
is ranked r from the top is the probability that there are exactly r −1
salespersons who are ranked above T
i
, and n −r salespersons who are ranked below. Let
K
r−1
i
be the set of salespeople who are ranked above T
i
, and K
n−r
i
be the set of sales people
ranked below. Then using (2), the probability of ranking below T
i
can be expressed as:
p(ε
j
≤ R(x
i
) − R(x
j
) +ε
i
) ∀j ∈ K
n−r
i
, j = i (A1)
=

R(x
i
)−R(x
j
)+ε
i
−∞
f (ε
j
)dε
j
∀j ∈ K
n−r
i
, j = i (A2)
= e
−e
[−µR(x
i
)−µR(x
j
)+µε
i
+γ ]
∀j ∈ K
n−r
i
, j = i (A3)
Similarly, the probability of ranking above T
i
can be expressed as:
= 1 −e
−e
−[µR(x
i
)−µR(x
k
)+µε
i
+γ ]
∀k ∈ K
r−1
i
, k = i (A4)
The probability of T
i
finishing in the rth position from the top is given by:
p(Q
i
= r) =
(n −1)!
(n −r)! · (r −1)!


−∞
f (ε
i
) ·
¸
k∈K
n−r
i
,k=i
¸
e
−e
−[µR(x
i
)−µR(x
k
)+µε
i
+γ ]
¸
·
¸
k∈K
r−1
i
,k=i
¸
1 −e
−e
−[µR(x
i
)−µR(x
k
)+µε
i
+γ ]
¸
· dε
i
(A5)
The reader will notice that in the event of T
i
ranking first, (A5) reduces to the familiar
multinomial logit model:
p(Q
i
= 1) =
e
µR
(x
i
)
¸
j ∈T
e
µR
(x
j
)
(A6)
ALLOCATING A PROMOTION BUDGET 31
The tournament economics literature has demonstrated that every member of a homogenous
sales force will exhibit the same effort level x

at equilibrium, and hence shall enjoy the
same probability of winning a prize. In other words,
p(Q
j
= r)|
x
j
=x

∀j ∈T
=
1
n
∀r ∈ {1, 2, . . . , n} (A7)
Now consider a situation where the rest of the sales force is exhibiting effort z, while
salesperson T
i
is exhibiting a different level of effort x
i
. Under this scenario, (A5) becomes:
p(Q
i
= r) =
(n −1)!
(n −r)! · (r −1)!


−∞
f (ε
i
) ·
¸
e
−e
−[µR(x
i
)−µR(z)+γ +µε
i
]
¸
n−r
·
¸
1 −e
−e
−[µR(x
i
)−µR(z)+γ +µε
i
]
¸
r−1
· dε
i
(A8)
By using the density function (8) and by making the following substitution,
t = e
−e
−[µR(x
i
)−µR(z)+γ +µε
i
]
we get:
p(Q
i
= r) =
(n −1)!
(n −r)!(r −1)!
· e
µ[R(x
i
)−R(z)]

1
0
t
n−r−1+e
µ[R(x
i
)−R(z)]
· (1 −t )
r−1
dt (A9)
The integral in (A9) is the well-known beta function B(x, y) (Kreyszig, 1983):
B(x, y) =

1
0
t
x−1
(1 −t )
y−1
dt =
(x)(y)
(x + y)
∀x > 0, y > 0 (A10)
where (y) is the gamma function:
(y) =


0
u
y−1
e
−u
du =
(y +h +1)
y(y +1) · · · ·(y +h)
(A11)
Using the expression (A10) in (A9) we get:
p(Q
i
= r) =
(n −1)!
(n −r)!(r −1)!
· e
µ[R(x
i
)−R(z)]
·
(n −r +e
µ[R(x
i
)−R(z)]
) · (r)
(n +e
µ[R(x
i
)−R(z)]
)
(A12)
Using the right-hand side expression in (A11), and recognizing that (r) =(r−1)! we get:
p(Q
i
= r) =
(n −1)!
(n −r)!
· e
µ[R(x
i
)−R(z)]
·
n−1
¸
k=n−r
(k+e
µ[R(x
i
)−R(z)]
)
−1
(A13)
Taking logarithm on both sides we obtain:
ln[ p(Q
i
= r)] = ln
¸
(n −1)!
(n −r)!
¸
+µ[R(x
i
) − R(z)] −
n−1
¸
k=n−r
ln(k +e
µ[R(x
i
)−R(z)]
)
(A14)
Differentiating both sides wrt x
i
we get:
∂p(Q
i
= r)
∂x
i
= p(Q
i
= r) · µ · R

(x
i
) ·
¸
1 −
n−1
¸
k=n−r
e
µ[R(x
i
)−R(z)]
k +e
µ[R(x
i
)−R(z)]
¸
(A15)
32 MURTHY AND MANTRALA
Given that we have an identical sales force, everyone is going to exhibit the same level of
effort and consequently enjoy the same probability of winning a prize. Hence, at equilibrium,
x
i
= x

& p(Q
i
= r) = 1/n. Consequently (A15) becomes:
∂p(Q
i
= r)
∂x
i
=
µR

(x

)
n
·
¸
1 −
n−1
¸
k=n−r
1
k +1
¸
(A16)
We assume salesperson disutility V(x) to be convex in effort x:
V(x) =
β
2
x
2
(β > 0) (A17)
Using (A16) in solving salesperson’s expected utility-maximizing problem (4), we get:
µR

(x

)
n
·
m
¸
r=1
¸¸
1 −
n−1
¸
k=n−r
1
k +1

· U(B
r
)
¸
= V

(x

) (A18)
Using (6) and (A17) to define the response function and disutility function respectively, we
obtain:
x

=
µ(τ
2

3
A)

m
¸
r=1
¸
1 −
n−1
¸
k=n−r
1
k +1

· U(B
r
) (A19)
Appendix B: Maximum Number of Prizes
From (A19) we see that the allocated equilibrium effort x

increases initially with the in-
crease in the number of prizes m. However, after a certain number of prizes, the coefficient
on the utility obtained from a particular prize salary is negative. This implies that x

de-
creases once a certain number of prizes is exceeded. Hence, the maximum number of prizes
M has to determined such that:
ω
M
= 1 −
n−1
¸
k=n−M
1
k +1
= 0 (B1)
The summation expression in (B1) may be regarded as the difference between two Harmonic
series, H(n) and H(n − M), where H(n) is defined by:
H(n) = 1 +
1
2
+
1
3
+· · · · · +
1
n
(B2)
Hence, our problem is to determine M for a given n, such that:
H(n) − H(n − M) = 1 (B3)
Now, H(z) may be expressed as:
H(z) = γ +ψ
0
(z +1) (B4)
ALLOCATING A PROMOTION BUDGET 33
where γ (= 0.577. . . .) is the Euler constant, and ψ
0
is the digamma function:
ψ
0
(z) =

(z)
(z)
= ln(z −1) +
1
2(z −1)


¸
i =1
b
2i
2i (z)
2i
(B5)
and b
2i
are Bernoulli numbers.
Substituting the relations (B4) and (B5) in (B3), and ignoring the difference in the sum-
mation of the Bernoulli terms we obtain,
ln

n
n − M

=
M
2n(n − M)
+1 (B6)
For large n 0, an approximate solution is:
M ∼ n ·

e −1
e

+1 (B7)
Appendix C: Advertising Allocation When Sales Force Participation is Guaranteed
Let B = P − A denote the total prize amount allocated for the sales contest with a total
of m prizes, where B
r
denotes the r
t h
prize. Recognizing that the very last prize B
m
=
B −
¸
m−1
i =1
B
i
, and substituting the power-utility function (8), the expression for sales force
effort (10) becomes
x =
µ(τ
2

3
A)
nβδ
¸
ω
1
B
δ
1

2
B
δ
2
+· · · +ω
m−1
B
δ
m−1

m

B −
m−1
¸
i =1
B
i

δ

(C1)
In order to maximize the effort in (C1), we evaluate the first-order conditions against any
prize level B
r
∂x
∂ B
r
=
µ(τ
2

3
A)

¸
ω
r
B
δ−1
r
−ω
m

B −
m−1
¸
i =1
B
i

δ−1

= 0 (C2)
From (C2), we obtain the following,
B
r
=

ω
m
ω
r
1
δ−1

B −
m−1
¸
i =1
B
i

(C3)
Using (C3), and the expression
¸
m
i =1
B
i
= B, we get
B
r
=

ω
1
1−δ
r
¸
m
i =1
ω
1
1−δ
i

B (C4)
And the expression for salesforce effort (10) becomes
x =
µ(τ
2

3
A)

B
δ
δ

m
¸
r=1
ω
1
1−δ
r

1−δ
(C5)
34 MURTHY AND MANTRALA
Substituting (C5) in the firm’s profit function (M2), and imposing the constraint that B =
P − A we get
E(π) = gn
¸
τ
0

1
A +
µ


2

3
A)
2
·
(P − A)
δ
δ
·

m
¸
r=1
ω
1
1−δ
r

1−δ

− P (C6)
First-order conditions of the firm’s profit function in (C6) with respect to advertising A
results in the following expression,
¸
(2 +δ)A +δ
τ
2
τ
3
−2P
¸
·

τ
2
τ
3
+ A

=
τ
1

2
3
· (P − A)
1−δ
(C7)
where
k =
µω
1
nβδ
· (1 +
m
¸
r=2
(
ω
r
ω
1
)
1
1−δ
)
1−δ
For a risk-neutral sales force, δ=1, and (C7) reduces to the expression for optimal adver-
tising in (13). Expression (C7) shows that in the absence of synergy (τ
3
= 0), the optimal
advertising is given by:
A

= P −

kδτ
2
2
τ
1

1/1−δ
(C8)
And that in the limit as synergy increases and approaches infinity,
A

=

2
2 +δ

P (C9)
So, if the advertising allocation given by (C8) is > (≤) the limit (C9), i.e., if P > (≤)
(2+δ
δ
(
kδτ
2
2
τ
1
)
1/1−δ
, then the optimal advertising allocation decreases (increases) as synergy
increases. The corresponding result in the special case of a risk-neutral sales force (δ = 1)
is discussed in Proposition 2.
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