I know traditionally that advertising a product’s positive benefits, or using other tactics like fear and isolation (in vs out-group) can cause people to purchase a product, but nowadays, when it feels like there’s an oversaturation of product advertising, how do companies get returns on the millions that they spend on advertising? Is it subliminal messaging or do people really still see a product advertised and think “Cool I want that”?
In: Economics
One of the main reasons to spend money on advertising is to increase awareness, because if you don’t advertise, then nobody knows about it. That, of course, leads to oversaturation of advertising.
Advertising is just one expense, and not necessarily the largest expense. The largest expense a company must endure is, typically, payroll, which includes research, development, engineering, and all the other employee functions needed to keep the business going. There are manufacturing costs, various certifications for safety, efficacy, reliability, and so on. There’s servicing debt, leasing of capital equipment and buildings. There’s taxes on sales. And there’s advertising. Advertising is just one part of the whole picture.
The basic objective is for sales revenue to exceed the expenses, which results in a positive net income (profit) that can be reported to shareholders. Advertising isn’t the biggest expense.
You asked about return on advertising. This is basically “how much more revenue did we make after the ad campaign, than before the ad campaign?” That difference less the cost of advertising, divided by the cost of advertising, is the return on advertising. If revenue increase exceeded the cost of the ad campaign, it’s a positive return. That return could be anything from a bump in sales after the airing of an ad to a long-term sustained increase in sales.
Bear in mind that promotion doesn’t always mean commercials on TV or ads on the internet. Promotion can be more subtle, like giving a couple of free products to YouTube influencers, or positive press releases about environmental accomplishments to make people think of the company in a good light. The best promotion of all is word-of-mouth by customers, because that costs the company nothing except the expense of producing superior products.
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