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LECTURE 8: Empirical Studies; Advertising Cost and Media AEM 4550: Economics of Advertising Prof. Jura Liaukonyte

Firm Specific Factors When assessing the goodwill impact of advertising, it is important that firm-specific factors not be omitted. It may be that advertising affects initial sales but that long- term sales are driven by firm-specific factors, like product quality. Given that higher-quality firms may advertise more, the effects of advertising on future sales may be overstated in an empirical analysis that omits product quality. Kwoka (1993) examines the determinants of model sales in the U.S. auto industry, finding that the effect of advertising is short-lived while product styling has a much longer impact.

Advertising and Industry (Primary) Demand Empirical studies suggest that advertising may increase primary demand in some industries but not others. (increase the size of the pie) Positive relationships between industry advertising and sales: UK cigarette industry U.S. cigarette industry U.S. orange market U.S. auto industry U.S. milk market No effect: U.S. beer market UK instant-coffee market

Advertising and Brand Loyalty No clear consensus. The studies do not provide strong evidence that advertising consistently increases brand loyalty or stabilizes market shares.

Brand Loyalty Recall Persuasive view: The direct effect of advertising is that brand loyalty is created and the demand for the advertised product becomes less elastic. Lack of high detail data – need exposure and brand-purchase data as well as the advertising and pricing behaviors of rival firms. Partly remedied by advent of supermarket scanner data. Possible ways to test for brand loyalty: Estimate demand functions for individual brands, in order to see if consumers exhibit more “inertia” in highly advertised markets. See if the estimated price elasticities are lower in magnitude in product groups with high advertising intensity. Infer the extent of brand loyalty, by further examining the relationship between advertising and market-share stability.

Advertising Costs and Media

TV is still by far the largest Ad medium

TV is still by far the largest Ad medium

Largest U.S. TV networks (in millions $)

Prime time

Prime time

Prime time

Prime time

3rd Quarter 2002 Analyst Presentation 6/4/2018 8:12:35 PM Media Selection Coverage is the theoretical maximum number of consumers in the retailer’s target market that can be reached by a medium and not the number actually reached. Reach is the actual total number of target customers who come in contact with an advertising message. Cumulative Reach is the reach that is achieved over a period of time. Frequency is the average number of times each person who is reached is exposed to an advertisement during a given time period.

When High Frequency Is Used A new brand A smaller, less known brand A low level of brand loyalty Relatively short purchase and use cycle With less involved (motivated and capable) target audiences With a great deal of clutter to break through

Media Selection Cost Per Thousand Method (CPM) is a technique used to evaluate advertisements in different media based on cost. The cost per thousand is the cost of the advertisement divided by the number of people viewing it, which is then multiplied by 1,000.

3rd Quarter 2002 Analyst Presentation 6/4/2018 8:12:35 PM Media Selection Cost Per Thousand – Target Market (CPM-TM) Is the cost of the advertisement divided by the number of people in the target market viewing it, which is then multiplied by 1,000. Impact refers to how strong an impression an advertisement makes and how well it ultimately leads to a purchase.

Examples of CPM SUPERBOWL 2016 CPM =$44.68 YOUTUBE 2013 CPM=$7.6 Cost of exposure in 2016, $5 million for a 30-second spot Calculate CPM for a 2016 Superbowl ad = 5*1000/111.9 = $44.68 YOUTUBE 2013 CPM=$7.6 HULU 2013 CPM = $25-$40

Magazine CPMs (2010 data)

Network TV CPMs CSI $19.59 Without a Trace $13.83 CSI Miami $17.30 Desperate Housewives $11.81 Everybody Loves Raymond $25.19

Gross Rating Points GRPs = Reach X Frequency. GRPs measure the total of all Rating Points during an advertising campaign. A Rating Point is one percent of the potential audience. For example, if 25 percent of all targeted televisions are tuned a show that contains your commercial, you have 25 Rating Points. If, the next time the show is on the air, 32 percent are tuned in, you have a total of 25 + 32 = 57, and so on through the campaign.

Media Tactics Three ways to schedule the same number of GRPs

Selling Network Television NETWORKS SELL THEIR TIME IN 3 STAGES: The Upfront Market The Scatter Market The Opportunistic Market

Television Sells Spots Like Airlines Sell Seats If a flight leaves with empty seats, revenue for the seat is zero. To assure full planes, sell the seats at a price that will sell them out early. Charge last -minute buyers highest price

1. THE UPFRONT MARKET Annual purchase of commercial time well in advance of the telecast time. Upfront advertisers buy 70% of prime time and 50% of other dayparts. Most buy for one year. Get best price. Biggest national advertisers buy children’s programs, prime time, daytime, news, and late night.

2. SCATTER MARKET Sale of most of the year’s remaining inventory not sold at upfront. Inventory generally tight. Prices usually 50% higher than upfront.

3. OPPORTUNISTIC MARKET Last-minute buying of inventory due to: Changes in programming Advertisers don’t want to be on controversial programs Advertiser inability to pay

Cancellations and Guarantees Most network orders are non-cancelable. If an advertiser cannot or does not want the time, it is the advertiser’s responsibility to sell the time - not the network’s. Networks cancel programs with no notice to the advertiser with the provision that commercials will run in another program that delivers the same audience profile.

Ratings Guarantees The cost of network time is based on network guarantees of spot price vs. audiences, computed in cost per thousand. If the ratings projected by the network to the advertiser are not achieved, the network runs the spot in other programs to accumulate sufficient ratings to bring the CPM down to the promised level. The extra spots the advertiser gets are called MAKEGOODS

Ratings Guarantees Networks are incentivized to give a slightly inflated estimate than to low-ball it and outperform (additional GRPs are free for advertisers). Networks aim to estimate ratings of new shows within 5% of what they will deliver (and usually on average they achieve that). Otherwise a lot of inventory will need to be given back as makegoods. Predictions are based on last year’s performances among other things. Examples: 2013 Baseball World Series resulted in makegoods. Some makegoods can be transferred to HULU

Volatility of Ratings