strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: August 26, 2005

 
 

The Advertising Saturation Point

For every automobile, and maybe every product, there’s a threshold beyond which your ad budget is wasted.

Illustration © 2005 Dan Page
The field of marketing was in its infancy when 19th-century department store magnate John Wanamaker famously said, “Half the money I spend on advertising is wasted. The trouble is, I do not know which half.” Despite his complaint, Wanamaker — the most successful merchant of his era — was an advertising enthusiast who never reduced his ad campaign budgets. Ever since his time, retailers and manufacturers have taken it on faith that, although they can’t tell which part of their advertising is wasted, they had better spend at least as much as their competitors to protect their market share. They tacitly accept this as a necessary cost of doing business in a consumer economy.

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.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

Resources

  1. David A. Aaker, “The Relevance of Brand Relevance,” s+b, Summer 2004: The natural limits and opportunities in customer perceptions of brands represent another kind of marketing saturation point. Click here.
  2. Ranjay Gulati, Sarah Huffman, and Gary Neilson: “The Barista Principle: Starbucks and the Rise of Relational Capital,” s+b, Third Quarter 2002: An alternative to advertising allows Starbucks to build a premier brand in the commodity category of coffee. Click here.
  3. Evan Hirsh, Steve Hedlund, and Mark Schweizer, “Reality Is Perception: The Truth about Car Brands,” s+b, Fall 2003: Another research study by the same authors shows that consumers can be more rational than many advertisers expect. Click here.
  4. Paul Hyde, Edward Landry, and Andrew Tipping, “Making the Perfect Marketer,” s+b, Winter 2004: More relevant roles for marketing leadership in an era of higher pressure. Click here.
  5. Leslie H. Moeller, Sharat K. Mathur, and Randall Rothenberg, “The Better Half: The Artful Science of ROI Marketing,” s+b, Spring 2003: The larger context — an emerging movement of grounded, canny marketing practice. Click here. 
  6. Des Dearlove, editor, Results-Driven Marketing: A Guide to Growth and Profits, a strategy+business Reader, Fall 2005: Blending science and artfulness in marketing; contains all the articles named here and more. Click here.
 
Close
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.

Close