05 Advertising Flashcards
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Indirect and direct effect of advertising on firm value
Joshi, A., & Hanssens, D. M. (2010). The direct and indirect effects of advertising spending on firm value. Journal of Marketing, 74(1), 20-33.
Two reasons why consumers respond to advertising
- Persuasion: It alters tastes and creates product differentiation and brand loyalty
- Information: Search costs are high for consumers so advertising helps them with low-cost information (incl. signaling)
Indirect effect of advertising on firm value:
What is the brand advertising sales elasticity? When is it higher?
- Advertising elasticity means how much a variable (e.g. profit) changes when you change advertising by 1%
- It is higher for durable than for non-durable goods (Investitionsgüter, Konsumgüter)
- It is higher in the early stage than the mature state of the product life cycle
Two reasons why investors respond to advertising
- Spillover: Persuasion and information: Advertising informs and supports brand equity which influences investment behavior (familiarity effect)
- Signaling: Advertising serves as signal of financial well-being and competitive viability of a firm
5 aspects why and how advertising increases firm value
- Investor attraction: Advertising affects investor attraction and behavior (investor prefer holding stocks with recognition)
- Intangible assets: Advertising creates intangible assets that act as a ‘heding device’: They help protecting a firm from stock market downturns.
- Financial market intermediaries: (e.g. stock analysts) may strenghten the impact of advertising on firm value
- Reduce underpricing before IPO: Advertising investments are valuable before IPO as they can reduce underpricing
- Instant awareness: Advertising is value-complementary to other strategic functions e.g. R&D: It helps develop instant awareness of new products.
Name and explain 4 methods on how to set the advertising budget
- Affordable method: What executives believe the firm can afford
- Percentage-of-sales method: Specified percentage of current or expected sales
- Competitive parity method: Match competitors’ spending
- Objective-and-task method: Define advertising objectives, derive tasks to achieve them and estimate cost of those tasks
Give 8 marketing metrics on how to evaluate advertising
- Impressions = Number of exposures of an ad
- Rating = Measurement of audience size in %
- Reach = Measurement of audience size in total
- Frequency = Average number of times ad will be shown to an individual
- Gross Rating Points (GRPs) = Reach times frequency (total number of rating points)
- Target Rating Points (TRPs) = GRP times ratio of specifically targeted audience to total audience
- Cost per Thousand (CPM) = Cost to reach 1,000 people
- Cost per Point (CPP) = Cost to reach 1% of the audience
CASE: Ohio Art Company
What is the background of the firm and their product portfolio?
- Majority of sales from toys and 1/3 from custom metal lithography
- Flagship product: Etch a sketch (featured in Toy Story)
- Other popular toys: Betty Spaghetty doll 1998
- Products appeal to budget-conscious parents
- Shifting production to China in 2001 reducing cost 20-30%
- Alternating between profits and losses throughout the 1990s and until 2006
CASE: Ohio Art Company
What does the US toy industry look like in terms of players and market share?
- Dominated by 3 major retailers with high power indistribution channel
- Wal-Mart 25%
- Toys’R’Us 17%
- Target 12%
- Traditional specialty toy stores 20% -> premium strategy
- Online toy sales
CASE: Ohio Art Company
What does the high power of retailers in the distribution channel mean for companies like Ohio Art?
- Strong competition with other manufacturers as retailers are the only distribution channel
- Cost pressure and margin pressure
- Only pull strategy can be successful (e.g. advertising): Start at the consumer and pull the products through the distribution channel (instead of pushing products through the channel by offering incentives)
CASE: Ohio Art Company
Etch a sketch experiment:
What is the setup, the objective and the result?
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Setup:
- Field experiment: 3 weeks TV advertising in Cincinnati during holiday season (Nov/Dec 2006)
- Control group: 4 other cities with equal population
- Sales data of one retailer over the whole year 2006 for Etch a sketch and a control product ‘Doodle Doug’
- Objective: Find out how effective this advertising campaign is, i.e. by how much it increases sales
- One possible method: Compare difference in sales for Etch a sketch and Doodle Doug for the pre-treatment/treatment/post-treatment period between Cincinnati and control cities
- Result: Not effective. No effect observated during treatment period as sales for Etch a sketch increased by the same amount in control cities. After the treatment sales were higher than in control cities but also for Doodle Doug.
CASE: Ohio Art Company
Betty Spaghetty Experiment:
What is the setup, data+method, the objective and the result of the experiment?
- Setup:
- 2nd field experiment 4 weeks in summer 2007
- TV+radio advertising in Arizona for 2 models of the doll (Go Go Glam $9.99; Color Crazy $19.99)
- Control group: California
- Data and Method: Weekly sales data for the two products only over treatment period. Thus, can only compare sales in AZ with sales in CA over 4 weeks.
- Objective: Effectiveness of advertising and justification of shelf-space
- Result: Very effective advertising, in particular for expensive model. Sales and profits are 5x higher for Color Crazy and 2x higher for Go Go Glam in AZ.
- Neben-Resultat: There must have been price promotions made by the retailer as both products are on average sold beneath recommended retail price
CASE: Ohio Art Company
Compare the 2 experiments by means of various criteria.
CASE: Ohio Art Company
Final question: $2million each was calcualted for Etch a Sketch and Betty Spaghetty national advertising campaigns during two months in holiday season 2008. What is your recommendation?
see DIN A4 paper discussed with Malte
