Persuasive Advertising - J. Scott Armstrong [210]
1. Ask experts, working individually, to write down arguments in favor of, or against, an A/S ratio that differs from the average for the product category. For example, it would be higher if the company had some important new products. It would also be higher (lower) if it had a campaign that followed (did not follow) many of the advertising persuasion principles, or if it did well (poorly) relative to other ads in copy tests.
2. Ask the experts to provide estimates of how much the advertising/sales ratio should depart, in percentage terms, from the typical expenditure.
3. The estimates from the experts are then averaged, presumably using equal weights. To the extent that there is uncertainty (e.g., as shown by widely varying estimates), be conservative and avoid large deviations from the typical A/S ratio for the product class.
Consider using the Delphi procedure for steps 1, 2, and 3.
4. Obtain historical information on the A/S ratio for the product in question and adjust it by the estimates in #3 above.
Elasticity method and Wright’s rule
To apply the elasticity method,1 you can start by assuming that an advertising campaign will have a typical elasticity of about +0.1. This is based on Sethuraman and Tellis (1991), Tellis (2009), and related papers summarizing over 260 estimates of elasticities. Better yet, find the elasticity for your situation considering the type of product and the media. You can get some idea for this from Table 1 in the Sethuraman and Tellis paper. For example, the elasticity for durable goods is about 0.23 (because they often contain news) while that for non-durables is about 0.03.
The elasticity will be higher if your campaign follows the prescribed principles, and lower if it violates principles. In addition, elasticities are higher in the introductory phase of a product. They are lower at the brand level than at the industry level if the competitive brands tend to match their competitors’ advertising expenditures (Assmus, Farley, and Lehman 1984).
The elasticity for TV commercials is about 0.03 while that for print ads is about 0.17. Note, however, that these are non-experimental data. They do not imply that you can get a higher return by switching from TV to print, for example. Rather, they say that products that are appropriate for print advertising have a higher elasticity. For example, products that are in the early stages of the life cycle and those with substantive news are typically advertised by print media, so they have a higher elasticity than the well-known products advertised on TV. So first decide on the proper media, then use the appropriate elasticity. And if the decision on media is not clear-cut, be conservative in the selection of an elasticity by staying close to 0.1.
Once you have an estimate of the elasticity, apply Wright’s rule (Wright 2009): that is, set the advertising budget at a level equal to the elasticity times the gross margin on each item of the product being advertised times the forecasted sales.
For products that have been advertised for some time, the elasticity method can also be used to examine propose modest changes in proposed advertising expenditures. For example, to assess the impact of an increase of 10 percent on advertising expenditures, use the elasticity to assess the changes in the number of additional units that would be sold, then calculate the change in the gross margin that would be achieved.
Decomposition
Decomposition means that you take a complex problem, break it down in parts, estimate each part, then combine them. It is especially useful when the breakdown allows you to draw upon different sources of knowledge, and when each of the components is subject to less uncertainty than is the global estimate of elasticity. For evidence on the effectiveness of this method, see MacGregor (2001).
Determine elements of