Media Expenditures

Prepared by J. Scott Armstrong (details on him at jscottarmstrong.com). Please inform Scott about errors and also make suggestions (armstrong@wharton.upenn.edu) Scott has taken these slides from adprin.com, a site that he founded. That site contains interactive versions of these slides, along with linked references, videos, and webcasts, all in PPT and PPTX format that you can download.

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 years sales were 50,000 units, which was typical for the firm. Last years 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?

Adapted from AdPrin.com

BMWs more responsive to advertising. Why?

More news, more information, more attention by viewers as it is highinvolvement.

Adapted from AdPrin.com

Elasticity averages by media

Media Print TV

0.13 0.03

Why the difference?

Adapted from AdPrin.com

Print has more information, and can explain news. Used more for new high-involvement products

Adapted from AdPrin.com

Wrights 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), 164-169. To learn more, go to AdPrin.com

Adapted from AdPrin.com

Application
What would be the optimum advertising budget for one of your products according to Wrights Rule?

Adapted from AdPrin.com