Persuasive Advertising - J. Scott Armstrong [211]
Number of people in the target market exposed to the ad = T Percentage of above who
a) See the ad
b) Read the ad (percentage of “a”)
c) Understand the ad (percentage of “b”)
d) Intend to purchase because of the ad (percentage of “c”)
e) Actually purchase (percentage of “d”)
f) Repeat purchases from new buyers (percentage of “e”)
ROI = [{(T)*(a)*(b)*(c)*(d)*(e)*(f)*unit margin} minus the cost of campaign] divided by the cost of the campaign
The inputs can come from data or from expert judgments. For example, to estimate “understanding” of an ad, you might draw on data from Beltramini and Brown (1994), who estimated correct comprehension of 80 percent for print ads and 73 percent for TV commercials.
When relying on judgmental estimates, obtain independent estimates from at least five people, each of whom has knowledge about the effect of advertising. Ask each expert to provide an estimate of the expected effect of the ads, and also 95 percent confidence intervals about the estimates. Use equal weights to combine estimates of the expected effect and of the confidence interval.
Experimentation
Field experiments are ideal, given that it is feasible and economical to obtain information on response to the ads.
It is easy to experiment with direct response advertising. For example, if the advertising will be done by direct mail, try a sample of 10,000 names and test alternative versions of an ad, say 5,000 to each of two versions. Examine the profit made from the resulting sales and divide by the variable costs of the test ads (ignoring the cost of developing the ads and any fixed costs) to determine the return on investment. If profitable, then send the most effective ad to the rest of the mailing list. If they are close in effectiveness, send different ads to each subsample to spread the risk.
1 See the Glossary for an explanation of elasticities.
* * *
Appendix F
How to select an advertising agency
* * *
Below, I offer criteria for evaluating an advertising proposal. To determine whether the list is comprehensive, I reviewed it with five experts. In all, they represented over 120 years of experience in advertising. One of these experts was a director of a large New York advertising agency, one had been the head of advertising research for a large consumer products company, one was the founder and head of a moderate-sized Philadelphia agency, and two were marketing professors who had worked for ad agencies. I asked them what was missing from the list and how would they weight these factors in the evaluation of an agency.
The experts did not think anything was missing. The average importance weightings across the five experts are provided in parentheses. They were provided in 1996, and some of the criteria have been explained in more detail here, so they are only rough guides.
1. Planning techniques
Does the agency know how to plan a campaign effectively? For example, does it provide an effective time-line for developing a campaign? Does it consider alternative strategies? Does it have contingency plans? Much evidence exists that formal planning techniques will improve the performance of an organization. Is the agency aware of this research and of the recommended procedures? (9 percent)
2. Objectives
Does the agency focus on your primary objectives? Does it know how to assess the effectiveness of advertising so as to be able to determine whether the advertising is meeting these objectives? What are the measurable outcomes, and what level of success might be expected on each? Will the agency provide any guarantees on the success of the campaign? Can it tell whether the advertising is providing a good ROI? Is its compensation tied to the ROI of the campaign? (11 percent)
3. Target market research
If it is necessary to obtain additional information about the target market, does the agency know how to design and evaluate such