Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
APS 425
Fall 2015
Lydia Pinkham
Sales & Advertising Data
http://schwert.ssb.rochester.edu/a425/a425_pinkham.wf1
Sales & Advertising Data
• Corporations frequently worry about the efficacy of
their advertising expenditures. This data file contains
annual sales revenue (SALES) and advertising
expenditures (ADVERT) for the Lydia Pinkham
Company from 1907 through 1960, expressed in
thousands of dollars per year ($000).
• Their sole product was an alcohol-based elixir that was
supposed to cure vaguely defined “women’s ailments”
(before the FDA and FTC came along and limited the
scope of their claims).
(c) Prof. G. William Schwert, 2002-2015
1
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Lydia Pinkham's Original Formula
Source: Wikipedia
• Pleurisy root is diaphoretic, anti-spasmodic, carminative, and anti-inflammatory.
• Life root is a traditional uterine tonic, diuretic, anti-inflammatory, and emmenagogue
used for amenorrhea or dysmenorrhea.
• Fenugreek is vulnerary, anti-inflammatory, anti-spasmodic, tonic, emmenagogue,
galactogogue, and hypotensive.
• Unicorn Root was used by several Native American tribes for dysmenorrhea, uterine
prolapse, pelvic congestion and to improve ovarian function.
• Black cohosh is an emmenagogue, anti-spasmodic, alterative, nervine, and
hypotensive and is used traditionally for menopausal symptoms.
• The formula also contains drinking alcohol, ethanol
Prohibition in the US
Source: Wikipedia
• 18th Amendment to the US Constitution, prohibiting the sale of alcoholic beverages
was ratified in early 1919 and made effective in 1920
• Wartime Prohibition Act was effective in June 1919
• Volstead Act, the popular name for the National Prohibition Act, passed on October
28, 1919, which established the legal definition of intoxicating liquor
• March 22, 1933, the Cullen-Harrison Act allowed the manufacture and sale of certain
kinds of alcoholic beverages
• December 5, 1933, the ratification of the 21st Amendment repealed the 18th
Amendment, ending Prohibition
• During this time, the Lydia Pinkham product (which was 40% alcohol) remained legal
for sale
(c) Prof. G. William Schwert, 2002-2015
2
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Is Advertising a Capital Good?
• These data were used in early research papers by
marketing academics to study long-term effects of
advertising.
• The basic question is whether the money you spend on
advertising today helps build brand capital that
increases sales in future years.
• Of course, marketing managers are likely to think
positively about results that show the benefits from
advertising extend past the current sales year.
Or, Is Advertising Wasteful?
• A skeptical view that is sometimes expressed by nonmarketing managers is that the marketing department
will spend any money it can get its hands on.
• Since it is hard to measure the effectiveness of
advertising, firms spend more when it seems “cheap”
because they have a lot of cash coming in from
product sales, but cut back on advertising when times
are tough and sales are down.
• From this perspective, high sales revenue is the cause
of high advertising expenditures, not vice versa.
(c) Prof. G. William Schwert, 2002-2015
3
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Cross Correlations of
Sales and Advertising
•It looks like the
correlations are
stronger between
advertising and past
sales, than vice versa
Are Sales Affected by
Past Advertising?
• It looks like past
advertising has
little effect on
future SALES,
but DW is small
(c) Prof. G. William Schwert, 2002-2015
4
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Residual Autocorrelations
• Try AR(1)
model to fix
residual
autocorrelation
Sales & Past Advertising,
AR(1) Model
•Much better model
statistically
•$1000 of current advertising
is associated with $673 of
additional sales this period,
$202 of additional sales next
period, and $106 of
additional sales two periods
in the future
•Looks it only produces $981
in additional revenue, even
ignoring the time value of
money
(c) Prof. G. William Schwert, 2002-2015
5
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Actual & Residual Plot
Sales & Past Advertising,
AR(1) Model with Prohibition
•It looks like Sales were
about $147,000 higher during
the prohibition years
•P-value = .11
(c) Prof. G. William Schwert, 2002-2015
6
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Sales Related to
Past & Future Advertising
•It looks like higher current
sales are associated with
higher future advertising
•But, DW is low
Residual Autocorrelations
AR(1)?
(c) Prof. G. William Schwert, 2002-2015
7
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Sales Related to
Past & Future Advertising, AR(1)
•Now that the residual
autocorrelation is fixed, it
looks like the coefficients
of past and future
advertising are almost
symmetric
•Not at all clear that
advertising causes higher
sales
Actual & Residual Plot
(c) Prof. G. William Schwert, 2002-2015
8
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Can Advertising Help Predict Future
Sales (Given Past Sales)?
Coefficients of
lagged advertising
are negative, and
probably not
significant
Try a Wald test
Can Advertising Help Predict Future
Sales (Given Past Sales)?
Wald test shows
that lagged
advertising is
significant (and
negative!)
(c) Prof. G. William Schwert, 2002-2015
9
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Vector Autoregression of
Sales and Advertising
•Note that this is just a
quick way to run two
regressions at the same
time
•You’ve already seen
the sales regression
Vector Autoregression of
Sales and Advertising
•This is exactly
the same
regression we
saw three slides
ago
(c) Prof. G. William Schwert, 2002-2015
10
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Granger “Causality Tests” for
Sales and Advertising
Note that the “Granger Causality Test” is just the Wald
test for whether lagged Advertising helps predict future
sales, given past sales (except that there is no adjustment
for heteroskedasticity)
Vector Autoregression of
Sales and Advertising with Prohibition
•Include Prohibition as
another exogenous variable
(c) Prof. G. William Schwert, 2002-2015
11
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Vector Autoregression of
Sales and Advertising
•Looks like
advertising
increased more
significantly
than sales
during
prohibition
(c) Prof. G. William Schwert, 2002-2015
12
Pinkham Sales & Advertising Data
APS 425 - Advanced Managerial Data
Analysis
Links
Eviews worksheet
http://schwert.ssb.rochester.edu/a425/a425_pinkham.wf1
APS 425 Home Page
http://schwert.ssb.rochester.edu/a425/a425main.htm
(c) Prof. G. William Schwert, 2002-2015
13