Marketing Analytics

Fall 2022
MKTG 414
Vahid Karimi Motahhar
Vahid.karimimotahhar@sabanciuniv.edu
Week 3
Linear Regression and Correlation
Learning Objectives

• Explain what statistical model is and why it is important for marketing

• Understand, run and interpret results of simple marketing regression models

• Describe the importance of R-square in a marketing mix model

• Practice analytics with marketing mix model output

• Understand, run and interpret results of multiple marketing mix regression

model

• Understand Correlation
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Simple Linear Regression

• Least squares line

• Interpreting coefficients

• Prediction

• Cautions

• The formal model

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TV Ads and Sales

• Can you estimate the Lagged Sales, just by knowing how much Red
Bull spent on TV ads?

• We will fit a model to predict sales based on dollars spent on TV ads

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Linear Model

• A linear model predicts a response variable, y, using a linear function

of explanatory variables

• Simple linear regression predicts on response variable, y, as a linear

function of one explanatory variable, x

• We will create a model that predicts sales as a linear function of TV

ads

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Regression Line

• Goal: Find a straight line that best fits the data in a scatterplot

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Predicted and Actual Values

• The actual response value, y, is the response value observed for a particular
data point
• The predicted response value, ŷ, is the response value that would be
predicted for a given x value, based on a model
• In linear regression, the predicted values fall on the regression line directly
above each x value
• The best fitting line is that which makes the predicted values closest to the
actual values
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Predicted and Actual Values

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Residual

• The residual for each data

point is (actual - predicted = y
- ŷ) or the vertical distance
from the point to the line

• Want to make all the residuals

as small as possible. How
would you measure this?

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Least Squares Regression

• Least squares regression chooses the regression line that minimizes the
sum of the squared residuals

• Why do you think this is SQUARED?

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Equation of the Line

• The estimated regression line is

• Slope: increase in predicted y for every unit increase in x

• Intercept: predicted y value when x = 0

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Regression Results

• Results from regressing LaggedSales on TV

• Coefficients: (Intercept) 37.6786, ( TVad) 1.2307

• LaggedSales = 37.69 + 1.23 X TV

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Follow up question

• LaggedSales = 37.69 + 1.23 X TVads - Which of the following is the correct

interpretation?

A. The average sale is $37.69

B. For every extra $1.23 spent on TV ads, the predicted sales increase by $1

C. Predicted sales increases by $1.23 for each extra dollar spend on TV ads

D. For every extra $1.23 spend on TV ads, the predicted sales increase by
$37.69

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Prediction
• The regression equation can be used to predict y
for a given value of x

• LaggedSales = 37.69 + 1.23 X TVads

• If you spend 1000 on TV ads, your best guess at

sales is:

• LaggedSales = 37.69 + 1.23 X 1000

• you spend 1000 on TV ads, your best guess at

sales is:

$1,267.69 = 37.69 + 1.23 X 1000

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Sales = 1989.69 + 1.63 X TV ads

• If you spend $1847 on TV advertising, which of the following is your

best guess at sales?

A. Closer to $3000

B. Closer to $4000

C. Closer to $5000

D. Closer to $6000

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Regression Caution

• Do not use the regression equation or line to predict outside the range
of x values available in your data (do not extrapolate!)

• If none of the x values are anywhere near 0, then the intercept is

meaningless!

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R2

• R2 is the proportion of the variability in Y that is explained by the

The p-value for each term tests the null
model hypothesis that the coef cient is equal to
zero (no effect). A low p-value (< 0.05)
indicates that you can reject the null
hypothesis. In other words, a predictor
that has a low p-value is likely to be a
meaningful addition to your model because
changes in the predictor's value are related
to changes in the response variable.

Conversely, a larger (insigni cant) p-value

suggests that changes in the predictor are
not associated with changes in the
response.

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Significance (P-Value)

• Another piece of information that is important for interpreting results of a least

square regression is the P-Value.

• The P-Value reveals whether the estimate is likely to be greater or less than 0.

• The P-Value is a number between 0 and 1.

• If the P-Value is less than or equal to 0.05, which is a commonly accepted

threshold, then it is acceptable to say the estimate is significantly different than
0, or just significant.

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Using Correlations to Summarize Linear
Relationships
• Looking at the correlation between any pair of variables can provide
insights into how multiple variables move up and down in value together.

• Correlation measures linear association, not causation.

• The correlation (usually denoted by r) between two variables (call them x

and y) is a unit-free measure of the strength of the linear relationship
between x and y

• always between —1 and +1

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Interpreting Correlations: +1

• A correlation near +1 means that x and

y have a strong positive linear
relationship

• That is, when x is larger than average,

y is almost always larger than average,
and when x is smaller than average, y
is almost always smaller than average

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Interpreting Correlations: -1

• If x and y have a correlation near –1, this

means that there is a strong negative linear
association between x and y

• That is, when x is larger than average, y is

usually be smaller than average, and when
x is smaller than average, y is usually
larger than average

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Relationship between Correlation and R2

• The correlation between two sets of data is simply the square root of
R2 with the same sign as the sign of the slope in the simple linear
regression

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Thank you for your attention!
Vahid.karimimotahhar@sabanciuniv.edu
1015 SBS
+90 216 438 97 12

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