Introduction Advertising Defined A paid mediated form of

Introduction • Advertising Defined Ø A paid, mediated form of communication from an identifiable source, designed to persuade the receiver to take some action, now or in the future • Types of Advertising Ø Business to Consumer (B 2 C) Ø Business to Business (B 2 B) © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 1

Figure 7. 1 Example of the Use of Humor in B 2 B Advertising © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 2

The Magnitude of Advertising United States: $294 billion ($1, 000 person) © 2010 South-Western, a part of Cengage Learning. All rights reserved. Global: $360 billion 7– 3

Table 7. 1 Top 20 Spenders in U. S Advertising, 2006 ($ million) © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 4

The Magnitude of Advertising (cont’d) • Advertising-to-Sales Ratios Ø Advertising as a percentage of sales ranges from a low of 1. 3 % to a high of 29. 9 % Ø Ratios typically range from 2% to 10% with an average of 3. 1% across most B 2 C and B 2 B categories Ø Competition from larger firms forces smaller companies to have higher ratios Ø Personal care products based on image have high ratios © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 5

Table 7. 2 a Advertising-to-Sales Ratios for Select Product Categories © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 6

Table 7. 2 b Advertising-to-Sales Ratios for Select Product Categories © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 7

Table 7. 2 c Advertising-to-Sales Ratios for Select Product Categories © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 8

The Magnitude of Advertising (cont’d) • Advertising Effects Are Uncertain Ø Advertising is not just a current expense but rather is an investment Ø Advertising should not be managed as a discretionary variable cost Ø Advertising should not be the first reduction when financial pressures call for cost-cutting measures. Ø Consistent investment spending is the key factor underlying successful advertising Ø Stopping advertising can cause a brand to lose market momentum, reducing its equity and market share © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 9

Advertising Functions Informing Reminding and Increasing Salience Influencing Adding Value © 2010 South-Western, a part of Cengage Learning. All rights reserved. Assisting Other Company Efforts 7– 10

Advertising Functions • Informing Ø Making consumers aware of new brands. Ø Increasing TOMA (Top of Mind Awareness) Ø Teaching new uses for existing brands (called usage expansion advertising) v v v Campbell’s soup formal family dinners and for breakfast Special K for afternoon or late-night snacking Arm & Hammer baking soda as a deodorant for refrigerators • Influencing Ø Getting prospective customers to try advertised products and services: © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 11

Advertising Functions (cont’d) • Reminding and Increasing Salience Ø Enriching the memory trace for a brand so that the brand comes to mind in relevant choice situations Ø Increasing customers’ interest in mature brands and the likelihood of choosing brands that might have otherwise not been chosen. Ø Influence brand switching by reminding consumers that the brand is available and that it possesses favorable attributes. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 12

Advertising Functions (cont’d) • Using Advertising to Assist Other Company Efforts Ø To deliver coupons and sweepstakes Ø To assist sales representatives Ø To pre-sell a firm’s products by introducing the product and legitimizing salespeople’s claims Ø To augment the effectiveness of price deals © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 13

Figure 7. 2 The Advertising Management Process © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 14

The Role of Advertising Agencies Advertising Function Alternatives In-house Advertising Operation Purchase Services As Needed © 2010 South-Western, a part of Cengage Learning. All rights reserved. Use a a Full-Service Advertising Agency 7– 15

Why Advertising Agencies 7– 16

Table 7. 3 Top-10 U. S. Advertising Agencies in Ad Revenue, 2006 © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 17

Advertising Function Alternatives • In-House Advertising Operation Ø Necessitates employing an advertising staff and absorbing the operation costs Ø Unprofitable unless a company does a large amount of continual advertising © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 18

Advertising Function Alternatives • Purchase Services À la Carte Ø Advantages v Use services only when they are needed v Availability of high-caliber creative talent v Potential cost efficiencies Ø Disadvantages v Lack cost accountability v Financial instability of smaller boutiques © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 19

Advertising Function Alternatives • Full-Service Advertising Agency Ø Advantages v Access to in-depth knowledge and skills v Obtaining negotiating leverage with the media v Coordinating advertising and marketing efforts Ø Disadvantages v Some control of advertising function is lost v Larger clients are favored over small clients v Occasionally inefficient in media buying © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 20

Advertising Agency Organization Creative Services • Develop advertising copy and campaigns • Copywriters, production people, and creative directors Media Services • Selecting the best advertising media • Media planners develop overall media strategy • Media buyers procure the selected media Research Services • Study clients’ customers’ buying habits, purchase preferences, and responsiveness • Focus groups, mall intercepts, acquisition of syndicated research data Account Management • 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 © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 21

Agency Compensation Methods Commissions from Media Labor-based Fee System © 2010 South-Western, a part of Cengage Learning. All rights reserved. Outcome- or Performance-based Programs 7– 22

Agency of Record • Divorce account management and creative from media • Creative agency gets 12. 5%; media agency gets 2. 5% • Makes sense when a client has many brands (e. g. P&G can split brands amongst agencies but combine all media spending under one media specialist buyer) • Client benefits from better media rates and favorable positions. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 23

Ad-Investment Considerations: Which Position Is More Acceptable? • The Case for Investing Ø Advertising can increase profitability by increasing sales volume, enabling higher selling prices, and thus increasing revenue beyond the incremental advertising expense. • The Case for Disinvesting Ø Firms choose to reduce advertising expenses either when a brand is performing well or during economic recession in the belief that an expense reduction, with all else held constant, will result in increased profits. © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 24

Advertising versus Pricing Elasticity • Elasticity Ø A measure of how responsive the demand for a brand is to changes in marketing variables such as price and advertising • Calculating elasticity coefficients for price (EP) and advertising (EA): Ø EP = Percentage change in quantity demanded Percentage change in price Ø EA = Percentage change in quantity demanded Percentage change in advertising © 2010 South-Western, a part of Cengage Learning. All rights reserved. 7– 25