Promotions and the Bottom Line

For most firms, new products are growth engines, despite the fact that by some accounts as many as 60% of them fail. And even when a novel product or feature is a hit with consumers, the benefits accruing to the innovator may quickly evaporate as competitors rush to emulate. So most firms combine product innovation with promotional incentives to maintain consumer interest and stimulate sales. But what is known about their actual impact on corporate financial well-being?

Typically, marketing managers measure new-product success by assessing whether the product or new feature has achieved its objectives. Prone to self-reporting bias, such analyses are of questionable use in justifying product-innovation investments to CEOs and CFOs, because they lack objective measures of short- and long-term financial performance and firm-value effects.

However, a recent econometric study of the automobile industry addresses these shortcomings by measuring the short- and long-term impact of new-product introductions and promotions on top-line (revenues) and bottom-line (income/ profit) financial performance and stock-market value. Issued in February 2003 as a working paper of Dartmouth's Tuck School of Business, the study is “The Long-Term Impact of New-Product Introductions and Promotions on Financial Performance and Firm Value,” written by Koen H. Pauwels, assistant professor of business administration at the Tuck School of Business at Dart-mouth; Jorge Silva-Risso, executive director of marketing at J.D. Power and Associates and a visiting assistant professor at the Anderson Graduate School of Management, University of California, Los Angeles; Shuba Srinivasan, assistant professor of marketing at the A. Gary Anderson Graduate School of Management at the University of California, Riverside; and Dominique M. Hanssens, Bud Knapp Professor of Management at the Anderson Graduate School of Management, UCLA.

The researchers gathered data from 1996 to 2001 relating to the big six automobile manufacturers (DaimlerChrysler, Ford, General Motors, Honda, Nissan and Toyota) and six car categories such as SUV, minivan and premium compact. They used a total of 41 brands as the unit of analysis for marketing variables (for example, Ford's Lincoln and Toyota's Lexus brands).

Study data comprised sales-transaction information from J.D.