Dr.

Karim Kobeissi

Chapter 8: Advertising
Decision

Definition of Advertising
Advertising includes all the activities by which
visual or oral message are addressed to a
targeted segment of customers with the aim
of informing and influencing them to buy the
products or to act favourably towards the
ideas, persons, trademarks or institutions
features.

Importance of Advertising
To produce a commodity is one thing and to sell it
is another. There is a direct relationship between
advertisement and demand. The sales are likelyto
increase if expenditure on advertisement is increased.
On the contrary, if expenditure on advertisement is
reduced, it may lead to a fall insales. Advertisingis
essential for creating, increasing and maintaining the
demand for all the products in the present world of
competition. Therefore, advertising forms an integral
part of decision making and forward planning.

Advertising Elasticity of Demand (E A)

The effect of advertisement on the demandof a
product is measured by the advertising elasticity
of demand. It measures the responsiveness of demand
to the changesin advertising expenses.

Where:
EA = Advertising elasticity of demand in percent (%).
Q0= Initial demand level
A0= Initial advertising expense level
Q1= New demand level

Advertising Elasticity of Demand

The study of the advertising elasticity of demand
concept helps the management in studying the
effect of advertisement on the sales revenue.
Consequently, it helps the management in:
1) Deciding whether the expense on advertisement
should be increased or decreased or maintained
at present level.
2) Evaluating the effectiveness of various media of
advertisement.

Advertising Elasticity of Demand (con)

- If EA >1, advertisements expense should be
increased.
- If EA = 1, advertisements expense should be
maintained at present level.
- If EA < 1, advertisements expense should be
reduced which indicates that the more you spend on
advertising, the lower your sales ! ! ! ! That is a really
bad ad! You should probably fire whomever is in
charge

of

advertising.

Example on Advertising Elasticity of

Demand

Pepso has a soft drink product with the following:

The initial advertising expenditures = $400 = A 0
The initial quantity sold = 2,000 units = Q 0
The new spending on advertising = $500 = A 1
The new quantity sold = 3000 units = Q 1
1) Compute the advertising elasticity of demand.
2) Should Pepso amplify more its spending on advertising?
3) If yes, until when ?
Advertising elasticity of demand equal to 1.8%
)A 1 % increase in advertising expenditures increases demand 1.8 %
)Yes it should because EA > 1
)Until EA = 1 (saturation point at which expenditure on advertising should
be maintained)

Methods for Setting Advertising Budget

There are different methods for setting advertising
budget such as:
1 - A Fixed Percentage of Sales Approach:
According to this method, the advertising outlayis
determined as a fixed percentage on sales which
may be on the sales of past or current or future
sales. If it is fixed on future sales, the sales for a
certain future period are forecasted and the
advertisement expense is determined on the
basis of predetermined percentage.

Methods for Setting Advertising Budget

(con)

2 All You Can Afford Approach:

According to this method, expense on advertising is

determined keeping in view paying capacity of
the firm. If the firm is earning good profits and has
sound liquidposition, it may spend more amount
on advertising. Thus, the advertising expense is
determined

as

percentage

available with the firm.

of

cash

funds

Methods for Setting Advertising Budget

(con)

3 Competitor Parity Approach

Under this method, advertising expense is determined on

the basisof advertising outlays of different competitors
engaged in similar business. It is assumed that the
expenseof a firm on advertising should be sufficient in
creating

image

of

the

products

of

the

firm

in

comparisons to the products of competitive firms.Thus,

advertisement expenditure incurred by a particular firm
would depend on its share in total market.

Methods for Setting Advertising Budget (con)

4 Objective and Task
Approach
Under

this

method,

advertising

expense of a firm is determined

keeping in view predetermined
objectives

of

the

firm

(e.g.,

increase

awareness;

maintain

demand;

increase

demand;

respond to a competitor

new

advertising campaign; extend the

product life cycle..).