© 2010 South-Western, a part of Cengage Learning. All rights reserved.7–1 Introduction Advertising DefinedAdvertising Defined A paid, mediated form of

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 7–1

IntroductionIntroduction

• Advertising DefinedAdvertising Defined A paid, mediated form of communication from an A paid, mediated form of communication from an

identifiable source, designed to persuade the receiver identifiable source, designed to persuade the receiver to take some action, now or in the futureto take some action, now or in the future

• Types of AdvertisingTypes of Advertising Business to Consumer (B2C)Business to Consumer (B2C) Business to Business (B2B)Business to Business (B2B)


Example of the Use of Humor in B2B AdvertisingFigure 7.1


The Magnitude of AdvertisingThe Magnitude of Advertising

United States: United States: $294 billion$294 billion

($1,000 per person)($1,000 per person) Global:Global:$360 billion$360 billion


Top 20 Spenders in U.S Advertising, 2006 ($ million)Table 7.1


The Magnitude of Advertising (cont’d)The Magnitude of Advertising (cont’d)

• Advertising-to-Sales RatiosAdvertising-to-Sales Ratios Advertising as a percentage of sales ranges from a Advertising as a percentage of sales ranges from a

low of 1.3 % to a high of 29.9 %low of 1.3 % to a high of 29.9 %

Ratios typically range from 2% to 10% with an Ratios typically range from 2% to 10% with an average of 3.1% across most B2C and B2B average of 3.1% across most B2C and B2B categoriescategories

Competition from larger firms forces smaller Competition from larger firms forces smaller companies to have higher ratioscompanies to have higher ratios

Personal care products based on image have high Personal care products based on image have high ratiosratios


Advertising-to-Sales Ratios for Select Product CategoriesTable 7.2a


Advertising-to-Sales Ratios for Select Product CategoriesTable 7.2b


Advertising-to-Sales Ratios for Select Product CategoriesTable 7.2c


The Magnitude of Advertising (cont’d)The Magnitude of Advertising (cont’d)

• Advertising Effects Are UncertainAdvertising Effects Are Uncertain Advertising is not just a current expense but rather is Advertising is not just a current expense but rather is

an investmentan investment Advertising should not be managed as a discretionary Advertising should not be managed as a discretionary

variable costvariable cost Advertising should not be the first reduction when Advertising should not be the first reduction when

financial pressures call for cost-cutting measures.financial pressures call for cost-cutting measures. Consistent investment spending is the key factor Consistent investment spending is the key factor

underlying successful advertisingunderlying successful advertising Stopping advertising can cause a brand to lose Stopping advertising can cause a brand to lose

market momentum, reducing its equity and market market momentum, reducing its equity and market shareshare


Advertising FunctionsAdvertising Functions

Influencing

Informing

Assisting Other Company Efforts

Adding Value

Reminding and Increasing Salience


Advertising FunctionsAdvertising Functions

• InformingInforming Making consumers aware of new brands. Making consumers aware of new brands. Increasing TOMA (Top of Mind Awareness) Increasing TOMA (Top of Mind Awareness) Teaching new uses for existing brands (called usage Teaching new uses for existing brands (called usage

expansion advertising)expansion advertising) Campbell’s soup for formal family dinners and for breakfast Campbell’s soup for formal family dinners and for breakfast Special K for afternoon or late-night snackingSpecial K for afternoon or late-night snacking Arm & Hammer baking soda as a deodorant for refrigerators Arm & Hammer baking soda as a deodorant for refrigerators

• InfluencingInfluencing Getting prospective customers to try advertised Getting prospective customers to try advertised

products and services:products and services:


Advertising Functions (cont’d)Advertising Functions (cont’d)

• Reminding and Increasing SalienceReminding and Increasing SalienceEnriching the memory trace for a brand so Enriching the memory trace for a brand so

that the brand comes to mind in relevant that the brand comes to mind in relevant choice situations choice situations

Increasing customers’ interest in mature Increasing customers’ interest in mature brands and the likelihood of choosing brands brands and the likelihood of choosing brands that might have otherwise not been chosen.that might have otherwise not been chosen.

Influence brand switching by reminding Influence brand switching by reminding consumers that the brand is available and that consumers that the brand is available and that it possesses favorable attributes.it possesses favorable attributes.


Advertising Functions (cont’d)Advertising Functions (cont’d)

• Using Advertising to Assist Using Advertising to Assist Other Company EffortsOther Company Efforts To deliver coupons and To deliver coupons and

sweepstakessweepstakes

To assist sales representativesTo assist sales representatives

To pre-sell a firm’s products by To pre-sell a firm’s products by introducing the product and introducing the product and legitimizing salespeople’s claimslegitimizing salespeople’s claims

To augment the effectiveness of To augment the effectiveness of price dealsprice deals


The Advertising Management ProcessFigure 7.2


The Role of Advertising AgenciesThe Role of Advertising Agencies

In-house AdvertisingOperation

Purchase Services As Needed

Use a a Full-Service Advertising Agency

Advertising Function Alternatives

Why Advertising AgenciesWhy Advertising Agencies

7–16


Top-10 U.S. Advertising Agencies in Ad Revenue, 2006Table 7.3


Advertising Function AlternativesAdvertising Function Alternatives

• In-House Advertising OperationIn-House Advertising Operation Necessitates employing an Necessitates employing an

advertising staff and absorbing advertising staff and absorbing the operation coststhe operation costs

Unprofitable unless a company Unprofitable unless a company does a large amount of continual does a large amount of continual advertisingadvertising



• Purchase Services À la CartePurchase Services À la Carte AdvantagesAdvantages

Use services only when they are neededUse services only when they are needed Availability of high-caliber creative talentAvailability of high-caliber creative talent Potential cost efficienciesPotential cost efficiencies

DisadvantagesDisadvantages Lack cost accountabilityLack cost accountability Financial instability of smaller boutiquesFinancial instability of smaller boutiques



• Full-Service Advertising AgencyFull-Service Advertising Agency AdvantagesAdvantages

Access to in-depth knowledge and skillsAccess to in-depth knowledge and skills Obtaining negotiating leverage with the mediaObtaining negotiating leverage with the media Coordinating advertising and marketing effortsCoordinating advertising and marketing efforts

DisadvantagesDisadvantages Some control of advertising function is lostSome control of advertising function is lost Larger clients are favored over small clientsLarger clients are favored over small clients Occasionally inefficient in media buyingOccasionally inefficient in media buying


Advertising Agency OrganizationAdvertising Agency Organization

Creative Creative ServicesServices

• Develop advertising copy and campaigns • Copywriters, production people, and creative directors

Media Media ServicesServices

• Selecting the best advertising media • Media planners develop overall media strategy• Media buyers procure the selected media

Research Research ServicesServices

• Study clients’ customers’ buying habits, purchase preferences, and responsiveness

• Focus groups, mall intercepts, acquisition of syndicated research data

Account Account ManagementManagement

• Link the agency with the client• Act as liaisons so that the client does not need to interact

directly with several different service departments and specialists


Agency CompensationAgency Compensation

Commissions from Media

Labor-based Fee System

Outcome- or Performance-based

Programs

Agency Compensation

Methods

Agency of RecordAgency of Record

• Divorce account management and creative from Divorce account management and creative from mediamedia

• Creative agency gets 12.5%; media agency gets Creative agency gets 12.5%; media agency gets 2.5% 2.5%

• Makes sense when a client has many brands Makes sense when a client has many brands (e.g. P&G can split brands amongst agencies (e.g. P&G can split brands amongst agencies but combine all media spending under one but combine all media spending under one media specialist buyer)media specialist buyer)

• Client benefits from better media rates and Client benefits from better media rates and favorable positions. favorable positions.



Ad-Investment Considerations: Which Ad-Investment Considerations: Which Position Is More Acceptable?Position Is More Acceptable?

• The Case for InvestingThe Case for Investing Advertising can increase profitability by increasing Advertising can increase profitability by increasing

sales volume, enabling higher selling prices, and thus sales volume, enabling higher selling prices, and thus increasing revenue beyond the incremental increasing revenue beyond the incremental advertising expense.advertising expense.

• The Case for DisinvestingThe Case for Disinvesting Firms choose to reduce advertising expenses either Firms choose to reduce advertising expenses either

when a brand is performing well or during economic when a brand is performing well or during economic recession in the belief that an expense reduction, with recession in the belief that an expense reduction, with all else held constant, will result in increased profits.all else held constant, will result in increased profits.


Advertising versus Pricing ElasticityAdvertising versus Pricing Elasticity

• ElasticityElasticity A measure of how responsive the demand for a brand A measure of how responsive the demand for a brand

is to changes in marketing variables such as price is to changes in marketing variables such as price and advertisingand advertising

• Calculating elasticity coefficients for price (ECalculating elasticity coefficients for price (EPP) )

and advertising (Eand advertising (EAA):):

EEPP = = Percentage change in quantity demandedPercentage change in quantity demanded

Percentage change Percentage change in pricein price

EEAA = = Percentage change in quantity demandedPercentage change in quantity demanded

Percentage change Percentage change in advertisingin advertising

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© 2010 South-Western, a part of Cengage Learning. All rights reserved.7–1 Introduction Advertising DefinedAdvertising Defined A paid, mediated form of