IN5162 – Marketing Engineering

Regression Modelling

Marcel Goic
mgoic@uchile.cl

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 Mini Assignment
• In many industries, the brand value is a key performance metric to
evaluate promotional budget. There are several instruments available
in the market including the Brand Equity Index, the Brand Asset
Valuator and the Brand Valuation Model. Recently, some of these
evaluations have been complemented with information about touching
points which capture levels of activity of each brand in different
promotional vehicles. This opens the possibility to analyze the
effectivity of each touch point in increasing brand value.

• Let BVikt be the value of brand i in market (country) k in year t and

TPljikt be the percentage of customers assigning the level l (from 1-very
low to 5-very high) to the activity of touchpoint j for brand i in market k
in year t.

• Propose and justify a lineal regression model to evaluate the relative

impact of each touchpoint in building brand value.

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 Improving the Model(1)
• A naive attempt
𝐵𝑉𝑖𝑘𝑡 = 𝛼 + 𝛽 ⋅ 𝑇𝑃𝑙𝑗𝑖𝑘𝑡 + 𝜀𝑖𝑘𝑡
– This cannot be computed! Indices are not consistent

• Consistent Indices
𝐵𝑉𝑖𝑘𝑡 = 𝛼 + 𝛽 ෍ 𝑇𝑃𝑙𝑗𝑖𝑘𝑡 + 𝜀𝑖𝑘𝑡
𝑙,𝑗

– A direct sum over l makes no sense. They always sum to 1

and therefore we need a metric on the brand activity in the
corresponding touchpoint (Ajikt):

𝐴𝑗𝑖𝑘𝑡 = ෍ 𝑙 ⋅ 𝑇𝑃𝑙𝑗𝑖𝑘𝑡 𝐴𝑗𝑖𝑘𝑡 = ෍ 𝑇𝑃𝑙𝑗𝑖𝑘𝑡

𝑙 𝑙=4,5

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 Improving the Model(2)
• The wrong answer
𝐵𝑉𝑖𝑘𝑡 = 𝛼 + 𝛽 ෍ 𝐴𝑗𝑖𝑘𝑡 + 𝜀𝑖𝑘𝑡
𝑗
– This model is formally correct, but it does not answer the research
question; In this model all touchpoints are equally effective.

• A minimal viable model

𝐵𝑉𝑖𝑘𝑡 = 𝛼 + ෍ 𝛽𝑗 ⋅ 𝐴𝑗𝑖𝑘𝑡 + 𝜀𝑖𝑘𝑡
𝑗
– This is a reasonable starting point, but it has certain limitations.
• Intercept might depend on the firm or the market.
• The slope can depend on the firm, the market and the time

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 Improving the Model(3)
• Asking too much
𝐵𝑉𝑖𝑘𝑡 = 𝛼𝑖𝑘𝑡 + ෍ 𝛽𝑗𝑖𝑘𝑡 𝐴𝑗𝑖𝑘𝑡
𝑗
– This model has too many parameters. With 500 brands, 30
markets , 10 touchpoints and 10 years of data, we would
have 1.650.000 (500x30x10+500x30x10x10) parameters.

– These parameter are not identifiable. In other words, there is

no enough data to estimate a unique set of parameters that
are consistent with the data (geometrically, there are infinite
lines crossing a single point).

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 Other Ingredients
• Interactions or cross-effects:
– The joint effect of TV and Radio could be larger than the effect of TV
plus the effect of radio.

• We always have access to more variables

– Economic growth of each country, whether there are political
elections in that country that year, etc.

• Functional transformations
– They help to linearize relationships between variables:
ln(BVikt), β1BVikt ¡ + β2(BVikt ¡)2

• Hierarchical structures
– Some parameters of the model can be described as a function of
other parameters

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 Preliminary Takeaways
• There are infinite possible models and therefore it is not
possible to determine what is the best model.

• To define a good regression model, we need to find a

balance between complexity and explanatory power.
– Business and context knowledge.
– Ex-ante exploration of the variables.
• What is the nature of the relation between variables
• What variables have more dispersion
• What variables are relatively constant.
– Ex-post evaluation.

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Orange Juice Sales

A more comprehensive empirical

example

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 Scanner Data
• An important source of sales data comes from scanner
data, where sales are automatically recorded at the point
of purchase (this is why this type of data is also called POS
data).

• While scanner data allow for panel of customers with

history of purchases for each customer, in this example
we will focus on weekly sales at the store level.

• We are interested on
– Characterizing price elasticities of across stores.
– Forecasting demand for different price points.

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• In this exercise we will
analyze purchases from
the refrigerated orange
juice category.

• Data from Dominick’s, a

regional supermarket
chain in Chicago.
– 11 brands.
– 83 Stores.
– 121 weeks.

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 Tables
• The dataset consist in two tables.
– Sales: Sales, prices and promotional activity.
– Store Demographics: Store characteristics.

Sales Data
Store brand week logmove price deal feat
1 1 44 9.018695 0.06046875 1 0
1 1 45 8.723231 0.06046875 0 0
1 1 46 8.253228 0.06046875 0 0
1 1 47 8.987197 0.06046875 0 0

Store Demo
Tables can be STORE AGE60 EDUC ETHNIC INCOME HHLARGE
connected through 1 0.232 0.248 0.114 10.553 0.104
store column 2 0.117 0.321 0.005 10.922 0.103
3 0.252 0.009 0.035 10.597 0.132

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Data Exploration

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 Simple Models
• For simplicity of exposition, we only analyze the demand for
the first product (Tropicana Premium 64 oz). To complete the
exercise, we can repeat for each of the other products.

– M1: A simple linear model

𝑞𝑠𝑡 = 𝛼 + 𝛽𝑝𝑠𝑡 + 𝜉𝑓𝑠𝑡 + 𝜓𝑑𝑠𝑡 + 𝜀𝑠𝑡
– M2: Try log-transformations.
ln(𝑞𝑠𝑡 ) = 𝛼 + 𝛽ln(𝑝𝑠𝑡 ) + 𝜉𝑓𝑠𝑡 + 𝜓𝑑𝑠𝑡 + 𝜀𝑠𝑡
– M3: Hierarchical model.
𝑞𝑠𝑡 = 𝛼𝑠 + 𝛾0 + 𝛾1 𝐸𝐷𝑠 + 𝛾2 𝐼𝑁𝐶𝑠 𝑝𝑠𝑡 + 𝜉𝑓𝑠𝑡 + 𝜓𝑑𝑠𝑡 + 𝜀𝑠𝑡

• In M3 we consider Education (EDs) and Income (INCs) for each

store, but we have several other covariates. What if we use
automatic variable selection?

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 Adding Fixed Effects
• We can add fixed effects.
– Given the data structure we have, we can use store-fixed effects
(some stores sell more, others sell less).
– In a more general case where all products are considered at the
same time, we could use store and brand fixed effects.

• Models
– FE1: A simple linear model to compare (identical to M1)
𝑞𝑠𝑡 = 𝛼 + 𝛽𝑝𝑠𝑡 + 𝜉𝑓𝑠𝑡 + 𝜓𝑑𝑠𝑡 + 𝜀𝑠𝑡
– FE2: Add store fixed-effects
ln(𝑞𝑠𝑡 ) = 𝛼𝑠 + 𝛽ln(𝑝𝑠𝑡 ) + 𝜉𝑓𝑠𝑡 + 𝜓𝑑𝑠𝑡 + 𝜀𝑠𝑡

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 IN5162 – Marketing Engineering

Regression Modelling

Marcel Goic
mgoic@uchile.cl

18