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Published: August 26, 2005

 
 

The Advertising Saturation Point

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

Author Profiles:


Evan Hirsh (hirsh_evan@bah.com) 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 (schweizer_mark@bah.com) 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.
 
 
 
 
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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.