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

Advertising and Business Cycles  Advertising is more sensitive to business-cycle fluctuations than the economy.  Average co-movement elasticity is1.4.  Hence, a 1% increase in the cyclical component of GDP translates, on average, into a 1.4% increase in the cyclical component of the demand for advertising.  The extent of this sensitivity varies systematically across countries.  When companies tie advertising spending too tightly to business cycles, they experience higher losses: 1. A lower long-term growth of the advertising industry 2. A higher private-label share 3. Lower stock prices

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.

Empirical Studies: Main points 1. A firm's current advertising is associated with an increase in its sales, but this effect is usually short lived. 2. Advertising is often combative in nature.  An increase in advertising by one firm may reduce the sales of rival firms, and rivals may then react with a reciprocal increase in their own advertising efforts. 3. The overall effect of advertising on primary demand is difficult to determine and appears to vary across industries.

UP TO HERE FOR EXAM 1

Advertising Costs and Media

TV is still by far the largest Ad medium

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

Prime time

2014 data  The Cost of TV advertising continues to rise.  Compared with 2013: the cost of the average cable TV spot went up 7.1 percent, to $26,125.  Network TV stayed about the same, at $26,926.

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.

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 2015 CPM=$39.3  Cost of exposure in 2015, $4.5 million for a 30-second spot  Calculate CPM for a 2015 Superbowl ad = 4.5*1000/114.5 = $39.3  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 = 57, and so on through the campaign.

Media Tactics  Three ways to schedule the same number of GRPs