The model also does not reflect the impact of alternative forms of media, such as the Internet, on advertising. For automobiles, two-thirds of the advertising spend is still placed on broadcast or cable television. That may change during the next few years.
Nonetheless, it may be possible to calculate advertising saturation points for most consumer products, even in a changing media environment. To make those calculations, we need to articulate tangible answers to questions like these: How risky is it for the consumer to try the product? How much margin does the manufacturer make for each incremental unit sold? How easy is it to lure customers from a competitor? How much influence does advertising have for this category compared with others? Though these seem like generic questions, they can all be modeled if the sales and advertising spend data is available — as it almost always is.
Perhaps the most surprising conclusion from the automobile study was the rationality of underlying behavior. Over time, most companies optimize their way to the best possible level of advertising spend. As economists know very well, this is standard observable behavior in pricing. Those who charge too much lose market share; those who charge too little find themselves unable to sustain their offerings. Given a reasonable amount of time and freedom from regulatory constraint, prices gravitate toward an optimal equilibrium.
We believe the same thing happens in advertising. The cycle time is longer than it is with pricing, but the end result is the same. Those who recognize this first, and learn to keep predicting their saturation point amid a changing market environment, will keep one step ahead of the ad spend strategies of their competitors.
Reprint No. 05307
Evan Hirsh ([email protected]) is a vice president of Booz Allen Hamilton based in Cleveland. He specializes in strategic marketing, business unit strategy, and performance improvement for consumer and industrial companies. Mr. Hirsh is coauthor, with Steven Wheeler, of Channel Champions: How Leading Companies Build New Strategies to Serve Customers (strategy+business/Jossey-Bass, 1999).
Mark Schweizer ([email protected]) is a principal in Booz Allen Hamilton’s Cleveland office. He focuses on product, sales, and marketing strategy for manufacturers and distributors of highly engineered goods, with particular emphasis on automotive OEMs and suppliers.