Transcript Media Expenditures View as slideshow Adapted from AdPrin.com Estimating the impact of advertising for a typical product in a typical market Please answer the.

Media Expenditures
View as slideshow
Adapted from AdPrin.com
Estimating the impact of advertising for a typical product
in a typical market
Please answer the following question.
Caution: In the past, few people could provide reasonable
answers.
You work for a typical firm selling a typical product in a typical
market in the U.S.
Last year’s sales were 50,000 units, which was typical for the
firm.
Last year’s advertising budget was $1 million, which was
typical for the firm.
You plan to spend $1.1 million on advertising this coming year
by using typical advertising.
How many units do you expect to sell this coming year.
___________________ units?
Do your analysis and write your answer before going to the
next slide.
Adapted from AdPrin.com
Information about the products
What would you estimate the unit sales if the
product was:
BMW cars?
_______ cars
Bud Light beer? _______ truck-loads
Adapted from AdPrin.com
Elasticity method
Use the elasticity method in cases where an existing
product has been advertised.
Advertising elasticity (or “sensitivity to
advertising”) expresses the percentage change
in unit sales given a one percent change in
advertising expenditures.
Given an estimated elasticity of 0.1, if advertising
expenditure were raised by 10%, unit sales
would go up by 1%.
Adapted from AdPrin.com
Average advertising elasticities
Many studies have been done to estimate the elasticity of products for
various media.
On average the elasticity is about 0.1
So what is the answer for the first question at the start of this exercise?
50,500
Sethuraman & Tellis (1991), "An analysis of the tradeoff between advertising and price
discounting,” Journal of Marketing Research, 28, 160-174.
Assmus, G, J. U. Farley & D. R. Lehmann (1984), "How advertising affects sales: Meta-analysis of
econometric results," Journal of Marketing Research, 21, 65-74.
Adapted from AdPrin.com
Elasticity by type of product
Product type
Durable
Nondurable
0.23
0.09
So what is your new answer to BMWs versus Bud
Lite?
BMWs more responsive to advertising. Why?
More news, more information, more attention by
viewers as it is high-involvement.
Adapted from AdPrin.com
Elasticity averages by media
Media
Print
TV
0.13
0.03
Why the difference?
Print has more information, and can explain news.
Used more for new high-involvement products
Adapted from AdPrin.com
Wright’s Rule
Given estimates of advertising elasticity, how much
should you spend on advertising?
Ad expenditure =
(Elasticity) x (Gross margin per unit) x (forecasted
unit sales)
Wright, Malcolm (2009), “A new theorem for optimizing the
advertising budget,” Journal of Advertising Research, 49 (2), 164169.
Adapted from AdPrin.com
Application
What would be the optimum advertising budget
for one of your products according to Wright’s
Rule?
Adapted from AdPrin.com