Introduction
AT&T spent a reported US$ 1.59 billion in advertising and is America’s most advertised brand . This spending accounts for about 1% of all the US-measured media expenditures on advertising which includes ads on television, radio, print and secondary print media such as outdoor (billboards and posters), internet display advertisement and other placements. The math says that AT&T, in its desire to make its brand ubiquitous, spends an estimated US$ 5.05 per person living in the US. Data from the Ad Age Data Center indicates that the 200 most advertised brands in the United States spent US$ 50.2 billion on measured media in 2012. This amount is easily 36% of all the spending on measured media in the United States in the same year and is equivalent to roughly 1% of the country’s Gross Domestic Product (GDP) . The top ten advertisers also include Verizon, Chevrolet, McDonalds, Geico, Toyota, Ford, T-Mobile, Macy’s and Walmart . The rest of the companies that advertise truly have brands that almost everyone in the United States would recognize.
The power of advertising is immense. Advertising uses mass media to “persuade” its target audience. The desired action is for the target audience to take action (i.e. purchase) a certain product, service, idea or personality . Positive advertising drives the target audience to a desired behaviour. Despite the fact that advertising addresses these needs, there is no single definition that captures its entire essence. For one, advertising is a paid activity. It is a single way conveyance of information that is meant to persuade the intended audience. It disseminates this persuasive information through established channels such as the traditional media of print (examples are newspapers, magazines), television and radio. Non-traditional media is also as effective (if not growing more effective than) traditional media. These are mostly online advertising forms. Advertising has full control of the message it delivers, which unlike public relations, is more of an interactive delivery of messages to the target audience.
History of Advertising
Advertising is not a new concept. During the ancient times, the Egyptians were known to write messages conveying sales on papyrus to be posted on walls as a way to announce the availability of goods for trade or purchase. The Greeks, Romans and the early civilizations coming from the Mediterranean, Africa, Asia and even South America used crude methods of advertising as well . In the Middle Ages, trade and skills flourished as tailors, blacksmiths, millers and cobblers put signs on their places of work to advertise what the services they could offer. By the 17th century, advertising progressed to hand printed bills, particularly for medicines, as people started learning how to read and write. With the general expansion of wealth of the entire planet by the 19th century, advertisers also flourished and in France, the newspaper La Presse printed out the first paid advertisement in 1836 . The effect of this action is two –fold. The first is La Presse gaining more funding for printing thus increasing its readership that increased its overall level of profitability. Secondly, a new industry was born with advertisers realizing the power of being able to reach more people at any given time.
In 1842, Volney B. Palmer started an advertising agency in Philadelphia. He bought space in newspapers are a discounted price and then resold the purchased space to advertisers for a profit. Volney Palmer was an entrepreneur but he was not a consummate advertiser. He made money from the space, but not form doing the message of the advertisement, which was done by another company. In 1869, N.W. Ayer & Son planned, created and then placed an advertisement for its client becoming the first advertising agency . Thanks to N.W. Ayer & Son, advertising has become a profession and an extension of creative expression. This is especially true for women, who have made advertising a high choice for their professional careers.
Small advertisers have a large potential to make their companies profitable as well. Burns (2013) of Forbes magazine says that small advertising companies have the same level of passion, expertise and creativity as the larger advertisement agencies. And they normally operate at lower costs thereby making their services more cost-efficient.
Advertising and Profitability
In a study conducted by Hirschey in 2006, he found that there is positive effect on profitability of advertising regardless of firm size in the United States. According to Hirschey, the results of his analysis indicated that the intangible value of advertising is clear and that advertising increases the level of competition in any industry.
Other studies indicate that the expenditures of a firm on advertising have a direct if not positive effect on the market valuation of the company. This is supported by studies conducted by Subrahmanyan in 2005, by Grullon, et.al in 2004 and by Joshi and Hanssens in 2007 . These studies indicate that the use of advertising positively affects the profitability of the company. In addition, these studies prove that the theory of message repetition creates that value for the firm which is broken down into a current behavioural effect, a carry-over effect and a non-behavioural attitude effect . There have been many studies analysing the effects of advertising using data culled from actual field studies. There are studies conducted to capture the unbiased effect of advertising as well. There is also scholarly research proving that advertising is effective because it helps in the stimulation of sales, using a measurement of increasing sales per dollar spent on advertising. The question of whether advertising has a short-term effect or a long-term effect and therefore could be a decision point to consider when investing in advertising programs is extensive.
Abraham and Lodish (1990) points out that firms that are unable to judge the effect of advertising, whether it creates a long-term or a short-term stimulation of the target market significant enough to create additional sales is a common error leading to wastage. According to Eechambadi (1994), firm managers decide on the amount of money to be invested in advertising if they are certain that the effect of advertising meets a general financial, internally-agreed rate of return. He further states that the expenditure size is not the issue but rather the ability of the expenditure to provide anticipated returns. A study conducted by Kundu, et.al (n.d.) stated that in Indian firms, the expenditures on advertising and its effect on profitability and firm value is weak and is inconclusive, given the statistical analyses conducted. The researchers also state that the effect of advertising on profitability may be more complex, as other factors come into play such as the language of the marketing used and the language of finance analysed.
These studies however, have not affected the use of advertising nor does it affect the advertising industry in general. In the United States, the amount of advertising placements and the profitability of the companies providing these services are more affected by the condition of the national economy .
Regulations on Advertising
Commercial speech, which advertising is an exemplary example of, is a form of freedom of expression. This freedom is one of the highest fundamental of the United States’ constitution. The US Government however, regulates the use of financing from private organizations for sponsored forms for free speech, including funding received by politicians from corporations . Feingold (2012) finds corporate funding for politics unethical. He states that for years private corporations were not allowed to support politicians running for public office. A US Supreme Court decision has reversed that law and has allowed corporations to “financially support” their candidates . Similarly, Toobin (2013) states that this move is to “deregulate” political campaigns, which highlights the acceptance of the US courts on the contribution of private enterprises on the economy . This move by the US courts is not un-opposed as groups have rallied for its immediate reversal .
Because of the encompassing effects of advertising on society, the US Government has regulated its use. Regulating its use for political reasons is one example; the other is restricting its use so that it does not affect fair market play. The Federal Trade Commission (FTC) was initially the government agency that was given the powers to regulate advertising. In 1938, the FTC was responsible for bringing forward the case on the proposal to ban radio advertising for substances with alcoholic content . Between the years 1964 and 1969, the FTC led the banning of cigarette advertisement on radio and television as well.
Alcohol producers kept fighting however and in 1997, they succeeded in having the six-decade old policy lifted and were able to advertise distilled spirits on cable television . Special interest groups rallied against the move and in 1998, a Master Settlement Agreement between these groups officially terminated to advertisement use. The effect of this legal decision had profound impacts on the socio-economic landscape of America.
The US Supreme Court states that the government can regulate commerce through the restriction of commercial speech such as advertising. The courts also state that the law does not protect “pure commercial advertising” which was the decision based on the court’s banning of cigarette advertising in the 1940s. The view evolved and by the 1970s, the US Supreme Court ruled that the right to the freedom of speech should protect the right to receive information as well as much as it protects the right to free speech. The evolution of the court’s view is driven by the fact that the courts find truthful advertising is essential in making the right decisions for consumers which are essential in ensuring a fair and competitive commercial landscape and that the information is essential for regulating economic systems .
Yet the legality of the use of advertising remains a tricky, if not evasive issue. Corporations, wanting to compete at the highest possible levels, would pour massive amounts of money on activities that would give it a competitive edge. This includes advertising. The amount of money poured into advertising is explained by the fact that Americans are exposed to about 1,000 messages everyday but this recipient would only retain as much as 80 advertisements. The small window of opportunity makes it imperative for companies to belong to that small set of retained information. And of that information that the consumer can absorb, only a limited amount of data is actually presented.
The information that is held by the consumer and the supplier is therefore asymmetric and incomplete. Basic economic theory states that in perfectly competitive markets, full information is a pre-requisite. Because information that is complete is hard to acquire and even harder to convey, a free market situation is almost never existent. This leads to less than efficient market situations (i.e. determination of an equilibrium price) or even a market failure and the opportunity to manage the situation through government intervention. If the characteristics of products known to suppliers were to be conveyed to consumers, the imperfection of the market can somewhat be resolved. This is the economic value of advertising since it makes information available to the supplier available to the consumer as well. It tells that a product or service is available, the positive aspects of this product or service and its other benefits. Because of how successful companies have become and because of the high correlation of advertising and profitability, entrenched companies an pump prime their advertisements resulting in the inability of other competitors to enter the market. If a company utilizes considerable resource to advertise, then its competitors should do the same resulting in an upward-pull of advertising expenditures. If the competitors cannot successfully enter the advertising frontier, the firm that does so gains advantage and can utilize this advantage by having a degree of price control thus making the company more profitable in the long run. Advertising also creates a culture of loyalty. This culture of loyalty protects the incumbent first and creates a distinct barrier against new competitor-entrants but also ensures that firms remain sustainable over the long run.
The effect of advertising on competition is one of the issues that are still being resolved due largely to the fact that the uncertainties are numerous and complexly related. While it is true that advertising affects competition positively (thus reducing prices for consumers), the opposite end, that of banning the use of it, drives the market to imperfection that becomes detrimental to the industry as a whole. The use of regulation tries to find a middle ground, a scenario where firms are allowed to advertise to the point where competition remains healthy. The issue of whether that point can be empirically determined is an unresolved issue.
Should Corporations be allowed to Spend Unlimited Funds of Advertisements
The tricky issue here is saying when enough is enough. The amount of money firms spend on advertising is a variable number and is dependent on several factors. These factors may include the size of the company, the product life cycle, among others . According to the Schonfeld survey (espoused by Schonfeld & Associates, Inc., a research firm that publishes the advertising expenditures of firms in the United States), a ratio between advertising expenditures and sales (or A/S ratio) varies depending on the industry. This can help determine whether the company falls within an acceptable range based on what his competitors are doing. An alternative is a rule-of-thumb used by the U.S. Small Business Administration. The rule-of-thumb puts a spending of about 7 to 8% of gross revenues for marketing if a company makes less than US$ 5 million in annual gross revenues. In addition, the National Federation of Independent Business reports that about 2 to 5 percent of sales are allocated by most firms for advertising.
The absolute numbers vary depending on the size of the firm so if that were the case, a company such as Apple, whose brand is the highest worth in the world of about US$ 100 billion can utilize up to 7 or 8% of its revenues and literally crowd out competition by drowning the consumer with paid advertisements. However, we do not see Apple or any other conglomerate doing so in the near future, even if there is no distinct law that forebodes them to use their financial resources to advertise. Simply put, companies will not, by the very nature of their strategic positions, put less money in areas that deliver true value for their consumers and ultimately their shareholders.
Prudent managers understand that it is not one single aspect of the business that would drive the business forward. In some cases, such as in the emergence of technology, once the firm fully assimilates the new technology, its relevance diminishes. It is this understanding that leads managers to invest in aspects of the business that matter and invest in those aspects when they matter. These are then measured through performance metrics that are developed internally and therefore are more relevant to business managers, than rules-of-thumb approaches .
Firms are also adept to the changing consumer behaviours, the evolving channels and the shifting of priorities. According to Schwartz and Kim (2013) US firms were found to be spending more on human resource development and leadership and have kept advertising spending prudent by using Account-Based marketing. US firms were also found to be investing in automated marketing to improve efficiency, thus creating a more sustainable business model that would rely less on spending and more on interactive results. These findings highlight the conclusion of this report, that firms may be allowed to spend on advertising and it is the firm’s discretion to invest as much as it could on it. The effective managers will not overexpose the company to needless expenses and will steer the company to growth by using its resources to create better value for its customers and shareholders.
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