Why you should not include Macroeconomic variables in Base of MMM?
Yesterday, I wrote about “Baseline or Base in MMM is NOT “Unexplained Sales”. The post drew lot of interesting comments.
One interesting comment was “Why don’t we include Macroeconomic variables as part of Base in MMM?”
It is a good question.
I believe they should not be included as part of the Base for the following reasons:
Firstly, the media and marketing events are assumed to have continuous positive effect on the KPI (every day, week, month). But macro events have intermittent and unpredictable effect (sometimes negative too) on the KPI. In some weeks or months they may have an impact and in others they may have no impact.
Second, the base is construed to be a ‘structural demand’ .
Macro variables, on the other hand, are explicitly included in the model to explain variation in demand.
GDP changes, inflation shocks, tariffs etc are not part of the baseline. They are technically explainers of deviation from baseline.
But a paradox is also that, Macroeconomic factors during peaceful periods are often very boring and remain static.
Take GDP of some countries for example. They remain static at 3.1% month over month.
How do you reduce this variable to zero? you can’t.
But these variables have powers to explain the change in KPI over and above the media / marketing effects.
Predominantly they are good explainers of negative effects.
Therefore, though at first glance macroeconomic variables may seem to be a good contenders to be included in the base, they should not.
They don’t capture structural demand. Veblen goods almost always buck the macroeconomic trends and also bare necessity goods.
