Wilmore Paper Company Sales and Advertising Expenditures 2000-2008
Wilmore Paper Company(WPC)'s unit sales have been rising steadily for the past 30 quarters from approximately 389,000 cases in the fall of 2000 to 4.61 million cases in the winter of 2008. The rise in sales starts to slow down in the last 15 quarters with an average growth of 1.35% per quarter compared to the average of 17.13% in the first 15 quarters. Similar to the unit sales, WPC's advertising expenditures also increase almost every quarter from $158,000 in Fall 2000 to $3.99 million in winter 2008 with an average of 24.08% growth rate in the first 15 quarters and 4.26% average growth rate in the last 15 quarters. Because of this changing trend in sales growth, WPC can no longer depend on the same method to appropriate advertising money as in the past. As a result, this report proposes a more systematic method for WPC to set the advertising budget for the next quarter, spring 2008.
Rather than basing advertising budget on other factors such as sales and competitors as in the percentage-of-sales and competitive parity methods, the sales response model method is based on the assumption that sales are directly measured by advertising; therefore, through this method, it is possible to set an advertising budget and predict the amount of sales that will result from this budget rather than to set the amount of advertising budget based on past or future predicted sales which completely disregards the effect of adveritising on sales.
A sales response model is generated through a time series analysis. Time series analysis is a statistical method involving an analysis of historical data collected over time in order to find a response function that best represents the relationship between the dependent variable and the independent variable. In this particular analysis, nine response functions in the Current Effect model were analyzed with WPC's sales as dependent variable and WPC's advertising expenditures as independent variable. The accuracy of a function in predicting the dependent variable was tested by comparing the function's predicted values with the actual values from WPC's historical data.
The structure of this Web site is based on each step in the development of the sales response function from (1) Specification to determine the general form or shape of the response function, (2) Estimation to find the functions' parameters, (3) Verification to determine the extent to which the parameters can represent the data, to (4) Validation to measure how accurate the function is in predicting the dependent variable. The final section, Budgeting, contains a Java applet that utilizes the sales response function obtained from the previous four stages to predict WPC's net profit and sales based on the advertising budget entered into the applet. The advertising budget that represents the optimum sales and net profit would then be selected as the proposed budget for next quarter.
Please click here for Wilmore Paper Company's sales and advertising data