1. PowerPoint Presentation by Charlie Cook The University of West Alabama Eighth Edition © 2010 South-Western, a part of Cengage Learning All rights reserved. Overview of Advertising Management CHAPTER 7 INTEGRATED MARKETING COMMUNICATIONS IN ADVERTISING AND PROMOTION

2. 1.Understand the magnitude of advertising and the percentage of sales revenue companies invest in this marcom tool. 2.Appreciate that advertising can be extraordinarily effective but that there is risk and uncertainty when investing in this practice. 3.Recognize the various functions that advertising performs. 4.Explore the advertising management process from the perspective of clients and their agencies. 1.Understand the magnitude of advertising and the percentage of sales revenue companies invest in this marcom tool. 2.Appreciate that advertising can be extraordinarily effective but that there is risk and uncertainty when investing in this practice. 3.Recognize the various functions that advertising performs. 4.Explore the advertising management process from the perspective of clients and their agencies. Chapter Objectives After reading this chapter you should be able to: © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–2

3. 5.Understand the functions agencies perform and how they are compensated. 6.Explore the issue of when investing in advertising is warranted and when disinvesting is justified. 7.Examine advertising elasticity as a means for understanding the contention that strong advertising is a deposit in the brand equity bank. 5.Understand the functions agencies perform and how they are compensated. 6.Explore the issue of when investing in advertising is warranted and when disinvesting is justified. 7.Examine advertising elasticity as a means for understanding the contention that strong advertising is a deposit in the brand equity bank. Chapter Objectives (contd) After reading this chapter you should be able to: © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–3

4. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–4 Is Advertising Rocket Science? The truth is that advertising is harder than rocket science. Its news when a rocket launch fails. Its news when an ad campaign launch succeeds.The truth is that advertising is harder than rocket science. Its news when a rocket launch fails. Its news when an ad campaign launch succeeds.

5. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–5 Introduction Advertising DefinedAdvertising Defined A paid, mediated form of communication from an identifiable source, designed to persuade the receiver to take some action, now or in the future A paid, mediated form of communication from an identifiable source, designed to persuade the receiver to take some action, now or in the future Types of AdvertisingTypes of Advertising Business to Consumer (B2C) Business to Consumer (B2C) Business to Business (B2B) Business to Business (B2B)

6. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–6 Example of the Use of Humor in B2B Advertising Figure 7.1

7. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–7 The Magnitude of Advertising United States: $294 billion ($1,000 per person) Global: $360 billion

8. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–8 Top 20 Spenders in U.S Advertising, 2006 ($ million) Table 7.1

9. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–9 The Magnitude of Advertising (contd) Advertising-to-Sales RatiosAdvertising-to-Sales Ratios Advertising as a percentage of sales ranges from a low of 1.3 % to a high of 29.9 % Advertising as a percentage of sales ranges from a low of 1.3 % to a high of 29.9 % Ratios typically range from 2% to 10% with an average of 3.1% across most B2C and B2B categories Ratios typically range from 2% to 10% with an average of 3.1% across most B2C and B2B categories Competition from larger firms forces smaller companies to have higher ratios Competition from larger firms forces smaller companies to have higher ratios Personal care products based on image have high ratios Personal care products based on image have high ratios

10. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–10 Advertising-to-Sales Ratios for Select Product Categories Table 7.2a

11. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–11 Advertising-to-Sales Ratios for Select Product Categories Table 7.2b

12. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–12 Advertising-to-Sales Ratios for Select Product Categories Table 7.2c

13. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–13 The Magnitude of Advertising (contd) Advertising Effects Are UncertainAdvertising Effects Are Uncertain Advertising is not just a current expense but rather is an investment Advertising is not just a current expense but rather is an investment Advertising should not be managed as a discretionary variable cost Advertising should not be managed as a discretionary variable cost Advertising should not be the first reduction when financial pressures call for cost-cutting measures. Advertising should not be the first reduction when financial pressures call for cost-cutting measures. Consistent investment spending is the key factor underlying successful advertising Consistent investment spending is the key factor underlying successful advertising Stopping advertising can cause a brand to lose market momentum, reducing its equity and market share Stopping advertising can cause a brand to lose market momentum, reducing its equity and market share

14. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–14 Advertising Functions Influencing Informing Assisting Other Company Efforts Adding Value Reminding and Increasing Salience

15. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–15 Advertising Functions InformingInforming Making consumers aware of new brands. Making consumers aware of new brands. Increasing TOMA (Top of Mind Awareness) Increasing TOMA (Top of Mind Awareness) Teaching new uses for existing brands (called usage expansion advertising) Teaching new uses for existing brands (called usage expansion advertising) InfluencingInfluencing Getting prospective customers to try advertised products and services: Getting prospective customers to try advertised products and services: Creating primary demand Creating primary demand Building secondary demand Building secondary demand

16. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–16 Advertising Functions (contd) Reminding and Increasing SalienceReminding and Increasing Salience Enriching the memory trace for a brand so that the brand comes to mind in relevant choice situations Enriching the memory trace for a brand so that the brand comes to mind in relevant choice situations Increasing customers interest in mature brands and the likelihood of choosing brands that might have otherwise not been chosen. Increasing customers interest in mature brands and the likelihood of choosing brands that might have otherwise not been chosen. Influence brand switching by reminding consumers that the brand is available and that it possesses favorable attributes. Influence brand switching by reminding consumers that the brand is available and that it possesses favorable attributes.

17. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–17 Advertising Functions: Adding Value Innovating Improving Quality Altering Perceptions Adding Value Increases DCF

18. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–18 Advertising Functions (contd) Using Advertising to Assist Other Company EffortsUsing Advertising to Assist Other Company Efforts To deliver coupons and sweepstakes To deliver coupons and sweepstakes To assist sales representatives To assist sales representatives To pre-sell a firms products by introducing the product and legitimizing salespeoples claims To pre-sell a firms products by introducing the product and legitimizing salespeoples claims To augment the effectiveness of price deals To augment the effectiveness of price deals

19. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–19 The Advertising Management Process Figure 7.2

20. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–20 The Role of Advertising Agencies In-house Advertising Operation Purchase Services As Needed Use a a Full-Service Advertising Agency Advertising Function Alternatives

21. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–21 Top-10 U.S. Advertising Agencies in Ad Revenue, 2006 Table 7.3

22. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–22 Advertising Function Alternatives In-House Advertising OperationIn-House Advertising Operation Necessitates employing an advertising staff and absorbing the operation costs Necessitates employing an advertising staff and absorbing the operation costs Unprofitable unless a company does a large amount of continual advertising Unprofitable unless a company does a large amount of continual advertising

23. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–23 Advertising Function Alternatives Purchase Services À la CartePurchase Services À la Carte Advantages Advantages Use services only when they are needed Use services only when they are needed Availability of high-caliber creative talent Availability of high-caliber creative talent Potential cost efficiencies Potential cost efficiencies Disadvantages Disadvantages Lack cost accountability Lack cost accountability Financial instability of smaller boutiques Financial instability of smaller boutiques

24. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–24 Advertising Function Alternatives Full-Service Advertising AgencyFull-Service Advertising Agency Advantages Advantages Access to in-depth knowledge and skills Access to in-depth knowledge and skills Obtaining negotiating leverage with the media Obtaining negotiating leverage with the media Coordinating advertising and marketing efforts Coordinating advertising and marketing efforts Disadvantages Disadvantages Some control of advertising function is lost Some control of advertising function is lost Larger clients are favored over small clients Larger clients are favored over small clients Occasionally inefficient in media buying Occasionally inefficient in media buying

25. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–25 Advertising Agency Organization Creative Services Develop advertising copy and campaigns Copywriters, production people, and creative directors Media Services Selecting the best advertising media Media planners develop overall media strategy Media buyers procure the selected media Research Services Study clients customers buying habits, purchase preferences, and responsiveness Focus groups, mall intercepts, acquisition of syndicated research data Account Management Link the agency with the client Act as liaisons so that the client does not need to interact directly with several different service departments and specialists

26. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–26 Agency Compensation Commissions from Media Labor-based Fee System Outcome- or Performance-based Programs Agency Compensation Methods

27. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–27 Ad-Investment Considerations Are the Dollars Invested in Advertising Warranted?Are the Dollars Invested in Advertising Warranted? Profit = Revenue – Expenses Profit = Revenue – Expenses Revenue = Price × Volume Revenue = Price × Volume Volume = Trial + Repeat Volume = Trial + Repeat

28. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–28 Ad-Investment Considerations: Which Position Is More Acceptable? The Case for InvestingThe Case for Investing Advertising can increase profitability by increasing sales volume, enabling higher selling prices, and thus increasing revenue beyond the incremental advertising expense. Advertising can increase profitability by increasing sales volume, enabling higher selling prices, and thus increasing revenue beyond the incremental advertising expense. The Case for DisinvestingThe Case for Disinvesting Firms choose to reduce advertising expenses either when a brand is performing well or during economic recession in the belief that an expense reduction, with all else held constant, will result in increased profits. Firms choose to reduce advertising expenses either when a brand is performing well or during economic recession in the belief that an expense reduction, with all else held constant, will result in increased profits.

29. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–29 Advertising versus Pricing Elasticity ElasticityElasticity A measure of how responsive the demand for a brand is to changes in marketing variables such as price and advertising A measure of how responsive the demand for a brand is to changes in marketing variables such as price and advertising Calculating elasticity coefficients for price (E P ) and advertising (E A ):Calculating elasticity coefficients for price (E P ) and advertising (E A ): E P =Percentage change in quantity demanded Percentage change in price E P =Percentage change in quantity demanded Percentage change in price E A =Percentage change in quantity demanded Percentage change in advertising E A =Percentage change in quantity demanded Percentage change in advertising

30. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–30 Advertising and Price Elasticity Combinations SituationStrategy Consumers have well-established brand preferences such as during the decline stage of a products life cycle or in niche markets Maintain the status quo for present price and advertising levels because demand is neither very price elastic or advertising elastic Market is new products, luxury goods, and products characterized by symbolism and imagery Build image via increased advertising because demand is more advertising elastic than price elastic Market is a mature consumer goods market where consumers have complete information about most brands in the category and brand switching is frequent Grow volume via price discounting because brands are little differentiated causing the market to be more price than advertising elastic Market has brands in the product category that are inherently differentiable and products that are seasonal Increase advertising and/or discount prices because the market is both price elastic and advertising elastic

31. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–31 Ad Spending, Advertising Elasticity, and Share of Market Share of VoiceShare of Voice How much a firm spends on advertising relative to other brands in the category How much a firm spends on advertising relative to other brands in the category Advertising Strength: Share of MarketAdvertising Strength: Share of Market The predicted market share of a firm based on its advertising spending in comparison to the total level of advertising by all firms in its category The predicted market share of a firm based on its advertising spending in comparison to the total level of advertising by all firms in its category

32. © 2010 South-Western, a part of Cengage Learning. All rights reserved.7–32 The Effect of Advertising Elasticity on Brands Share of Market Table 7.4