Executive Summary
What percentage of marketing budgets should be allocated to advertising? Should more money be spent on advertising than on other promotions? Should advertising budgets be reduced during recession? These are questions brand managers face when developing their marketing plan. These questions have become more relevant to marketing in the 21st century with the advent of the Internet and social media marketing tools such as Facebook and Twitter. A key element in the decision to advertise is how effective advertising is in generating sales. Advertising response is often measured in terms of advertising elasticity, the percentage increase in sales or market share of a brand for a one percent increase in advertising.
This study conducts a meta-analysis of advertising elasticities and obtains several empirical generalizations which have implications for managers. A meta-analysis is a secondary study that analyzes findings from primary studies. It looks for the global mean and its variation by time, market, country, and methods of estimation. The authors’ search of the literature yields 751 short-term and 402 long-term direct-to-consumer brand advertising elasticities estimated in 56 studies published between 1960 and 2008. These elasticities cover a large cross section of brands, product-markets, time periods, and countries and are derived from a variety of data, measures, and methods. As such, they represent the ability to develop generalizations.
The authors find that the average short-term advertising elasticity is .12 and the mean long-term ad elasticity is .24, both of which are lower than prior meta-analytic means (.22 and .41, respectively) computed in 1984. The decline in ad elasticity suggests a reduction in conventional advertising if the firm was advertising optimally in the past. However, advertising elasticity does not decrease during recession. Therefore, in general, a firm does not need to cut back on advertising in a recession because it believes customers will not be responsive to advertising. The authors also find that advertising elasticity is higher for durable goods than nondurable goods and in the early stage of the life cycle than in the mature stage. The findings favor advertising for durable goods and in the growth stage of the life cycle, other things equal. Advertising elasticity is generally higher in Europe than in North America, raising a question of whether there is underadvertising in Europe and overadvertising in the United States. Television advertising elasticity is generally higher than print advertising elasticity in the short term, but print advertising elasticity is higher than television advertising elasticity in the long run. Managers should consider both short-term and long-term response when allocating budgets between the two media.
In addition, the authors find that factors such as data aggregation, temporal interval, estimation method, and functional form influence advertising elasticities. These findings call for careful consideration of the data and method employed for estimating advertising response. Overall, our results suggest substantially new findings about advertising, which advertisers, ad agencies, and marketing research analysts need to take into account prior to designing marketing strategies and allocating their budget to the marketing mix.
Biography
Raj Sethuraman (Ph.D., Northwestern) is the Marilyn and Leo Corrigan endowed professor and chair of Marketing in the Cox School of Business at Southern Methodist University. Professor Sethuraman’s research focuses on private label strategies, promotion strategies, and brand equity. He has published articles in leading journals and won many research awards, including the John Little award for the best paper in Marketing Science/Management Science, the Jagdish Sheth award for the best paper in the Journal of the Academy of Marketing Science, the O’Dell award for the best paper in the Journal of Marketing Research (runner-up), and the William R. Davidson Award for the best paper in Journal of Retailing (second place). His work was also listed in Social Science Research Network’s Top 10 Downloads (All-Time Hits) in marketing. He serves on the editorial boards of Marketing Science, Journal of Retailing, Journal of Modeling in Management, and Review of Marketing Science.
Gerard J. Tellis (Ph.D., Michigan) is Professor, Jerry and Nancy Neely Chair of American Enterprise, and Director of the Center for Global Innovation, at the USC Marshall School of Business. Dr. Tellis is an expert in advertising, innovation, global market entry, new product growth, global diffusion, quality, and pricing. He has published four books and more than 100 papers that have won more than 15 awards, including the Frank M. Bass, William F. Odell, Harold D. Maynard (twice), and the Vijay Mahajan award for lifetime contributions to marketing strategy. His citations number more than 5000 in Google Scholar. Dr. Tellis is a Trustee of the Marketing Science Institute. He is also an Associate Editor of Journal of Marketing Research and has been on the editorial review boards of Journal of Marketing Research, Journal of Marketing, and Marketing Science for several years.
Richard A. Briesch (Ph.D., Northwestern) is Associate Professor of Marketing in the Cox School of Business at Southern Methodist University. His primary areas of research include modeling consumer decision making and econometrics with current papers on promotions, advertising, and nonparametric methods. His articles have appeared in Journal of the American Statistical Association, Journal of Business and Economic Statistics, Journal of Consumer Research, Journal of Marketing Research, Marketing Science, and other leading academic journals.
Journal of Marketing Research, Volume 48, Number 3, June 2011
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