This summarizes a research paper presented at the International System Dynamics Conference in St-Gallen on July 25th, 2012. The aim was to leverage system dynamics modelling to address some limitations of the NBD-Dirichlet theory and link store promotions activities to category penetration and purchase frequency.
Many fast moving consumer goods (FMCG) categories like laundry detergents, diapers or cereals are mature and rather stable, so the interest is high for manufacturers to make diagnostics on the category and their brand to find growth opportunities. Attempts to model mature category dynamics have mostly been based on probabilistic models. The most famous one is the “NBD-Dirichlet” model, which was first presented in 1984 and has subsequently triggered significant research in the area.
The model has limitations as it assumes stable marketing and promotional activity and stable category dynamics. This paper uses a system dynamics model to relax some of these stability assumptions and explain how competitive dynamics impact the total category penetration, purchase frequency and volume size over time.
Key words: FMCG category dynamics; competitive interactions; impact of promotions; brand choice; buyer behavior; consumer purchasing; NBD-Dirichlet theory.