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Illustration © 2005 Dan Page |
But what if there was an optimal level of advertising spend for any given product — beyond which the money was completely wasted? Economists often speak of “price elasticity”: When prices rise or fall, consumers respond by changing their purchase strategies. That is why price increases do not automatically lead to equivalent rises in revenues. The same kind of elasticity exists with advertising. For any given brand in any given market, there is a saturation point for advertising spend. Up to that point, increases in the ad budget will generate results; but once the market for a product or service is saturated, no matter how much a company spends on advertising, it will not produce enough added sales to justify the cost. The best possible budget places just enough ads to reach the saturation point, and not a dollar’s worth of advertising more. Companies that follow this principle will optimize their overall profitability because they will spend on advertising only what they can recoup in revenues.
Advertising saturation points may not be identifiable for every type of product, but they are consistently apparent in one of the primary worldwide categories for consumer advertising: the motor vehicle industry. Every automobile brand — such as Ford, Chevrolet, Toyota, or Fiat — has its own unique optimal saturation point. Each can be predicted in advance, before a budget is set, and thus can be used in planning advertising spend strategies. A saturation point represents optimal advertising in terms of profits. Once it is established, the saturation point becomes a key criterion by which an advertising budget can be judged.
In 2004, in an in-depth Booz Allen Hamilton research study, we charted the pattern of media spend in the United States — on television, on radio, in newspapers, and in magazines — for all automobile brands sold between 1998 and 2004. We then estimated the saturation point for any given brand, using a statistical model based on an analysis of the three key factors that consistently seem to correlate with advertising spend:
1. The number of vehicle nameplates supported by a brand (excluding any niche vehicles, such as the Honda S2000, that represent only a tiny fraction of a brand’s volume). In general, a brand like Chevrolet or Ford, with 15 major vehicles produced in any given year, requires a larger budget than a brand like Saturn or Lexus, with only a handful of nameplates. (Nameplates is another word for automobile models, the individual vehicles released under a manufacturer’s “make” or “brand.”)
2. The number of nameplates launched or refreshed per year. For each major launch and each redesign and relaunch (which typically occurs every four or five years), manufacturers generally introduce a significant marketing campaign, and a higher level of ad spend is needed.
3. The brand’s market share (excluding nonretail sales, such as sales to rental car fleets, which require no advertising). As the total number of vehicles rises, two things happen: More is spent overall on advertising to support the brand, and less is spent per unit. Thus, with an increase in market share, the optimal advertising budget increases and the rate of increase slows down.
