How To Advertise: An Analysis of Contemporary Advertising (part 9)

Regional and National Advertisers

by

Charles Lamson

Some companies operate in one part of the country---in one or several states---and market exclusively within that region. These are referred to as regional advertisers. Typical examples include regional grocery and department store chains, governmental bodies (such as state lotteries), franchise groups (such as the Southern California Honda dealers), telephone companies (such as SBC), and statewide or multistate banks (like Bank of America).

Other companies sell in several regions or throughout the country and are called national advertisers. These include the consumer packaged-goods manufacturers (such as Procter & Gamble and Johnson & Johnson), national airlines (Delta, American), media and entertainment companies (Disney, Time Warner), electronics manufacturers (Apple, Hewlett-Packard), and all the auto companies. These firms also make up the membership of the Association of National Advertisers (ANA) and comprise the largest advertisers in the country.


How National and Local Advertisers Differ

 The basic principles of advertising are the same in both local and national advertising. However, local advertisers have special challenges stemming from the day-to-day realities of running a small business. As a result, local and national advertisers differ in terms of focus, time orientation, and resources.

Focus     National  companies are concerned about building their brands, so their advertising tends to focus on the competitive features of one brand over another, especially in conquest sales situations. Local merchants or dealers often carry hundreds of different brands or numerous models of an exclusive brand, so they focus on attracting customers to a particular point---their place of business. That is why local car dealers typically advertise their dealerships rather than the make of car. And local grocers often promote only those brands for which they receive co-op advertising or trade allowances from the national manufacturer.

In every product category, big companies battle for market share against a few competitors, and every share point is worth millions of dollars. Local advertisers compete with many companies, so their focus is on gross sales or volume: 60 cars a month, five new insurance policies a week, 55 oil changes a day.

National advertisers plan strategically to launch, build, and sustain brands. Local advertisers think tactically. Will a new $15,000 sign bring more people into the store?  Should we stay open Labor Day? Can we attract more lunchtime customers by reducing our prices or by offering free refills on soft drinks?

The relationship with the customer may be the greatest difference between national and local advertisers. National advertisers' marketing executives rarely see retail customers; instead they traditionally think in terms of large groups of people---segments, niches, target markets---with various geographic, demographic, or psychographic descriptions. They design their strategies and campaigns to appeal to these large groups.

But local advertisers deal with individual customers every day. They (and their families) also interact with their customers in nonbusiness ways; they may be neighbors, friends, or schoolmates. The local advertiser gets feedback every day---on the company's advertising, prices, product performance, employee service, store decor, and the new sign out front. The national marketer gets occasional feedback---from surveys and from customer complaint lines.

	National	Local
Focus	Brand Market share Strategies Markets	Point Volume, gross sales Tactics Customers
Time	Long-term campaigns	Sort-term ads
Resources	$5-$10 million+ Many specialists	Less than $1 million A few generalists

Exhibit 1 Differences between local and national advertisers.

Time orientation Due to differences in their focus and perspective, national and local advertisers also have different time orientations. National companies think long term. They develop five-year strategic plans and budget for annual advertising campaigns. Local advertisers worry that this week's ad in the Pennysaver did not pull (a term rarely used by national marketers) as well as last week's; a New York advertiser may have months to develop a network TV campaign; the little market on Main Street may have to churn out a new newspaper ad every week to reach its local customers.

Resources Finally, national advertisers have more resources available---both money and people. A local advertiser that spends $100,000 a year has a relatively large budget. A national advertiser needs to spend at least $5 million a year just to get started. (Walt Disney, by the way, spends $2.3 billion.)

The national advertiser has an army of specialists dedicated to the successful marketing of its brands. The local advertiser may have a small staff or just one person---the owner---to market the business. So the local entrepreneur has to know more about every facet of marketing communications.

How Large Companies Manage Their Advertising

In large companies, many people are involved in the advertising function. Company owners and top corporate executives make key advertising decisions; sales and marketing personnel often assist in the creative process, help choose the ad agency, and evaluate proposed ad programs; artists and writers produce ads, brochures, and other materials; product engineers and designers give input to the creative process and provide information about competitive products; administrators evaluate the cost of ad campaigns and help plan budgets; and clerical staff coordinate various promotional activities, including advertising.

A large company's advertising department may employ many people and be headed by an advertiser's manager who reports to a marketing director or marketing services manager. The exact department structure depends on many variables. Most large advertisers tend to use some mix of two basic management structures: centralized and decentralized.

Centralized organization Companies are concerned with cost efficiency and continuity in their communications programs. Thus, many embrace the centralized advertising department because it gives the greatest control and offers both efficiency and continuity across divisional boundaries. In centralized departments, an advertising manager typically reports to a marketing vice president. But beyond this one feature, companies may organize the department in any of five ways:

• By product or brand.
• By subfunction of advertising (copy, art, print production, media buying).
• By end user (consumer advertising, trade advertising).
• By media (radio, TV, newspapers, outdoor).
• By geography (western advertising, eastern advertising, European advertising).

The cereal giant, General Mills, for example, is one of the nation's largest advertisers. It operates a vast advertising and marketing services department with some 350 employees. It spends more than $555 million annually in media advertising and other promotional activities.

General Mills' Marketing Services is really many departments within a department. Its centralized structure enables it to administer, plan, and coordinate the promotion of more than 60 brands. It also supervises five outside ad agencies and operates its own in-house agency for new or smaller brands.

Organized around functional specialties (market research, media, graphics), Marketing Services helps General Mills' brand managers consolidate many of their expenditures for maximum efficiency. The media department, for example, prepares all media plans for the marketing divisions. The production and art department designs the packages for all brands and the graphics for the company's in-house agency. From one spot, Marketing Services handles a wide variety of brands efficiently and effectively.

Decentralized organization     As some companies become larger, diversify their product lines, acquire subsidiaries, and establish divisions in different regions or even different countries, a centralized advertising department often becomes impractical.

In a decentralized system, the company sets up separate ad departments for different divisions, subsidiaries, regions, brands, or other categories that suit the company's needs. The general manager of each division or brand is responsible for that group's advertising.

For large companies with many divisions, decentralized advertising is more flexible. Campaigns and media schedules can be adjusted faster. New approaches and creative ideas can be introduced more easily, and sales results can be measured independently of other divisions. In effect, each division is its own marketing department, with the advertising manager reporting to the division head.

A drawback, though, is that decentralized departments often concentrate on their own budgets, problems, and promotions rather than the good of the whole company. Across divisions, ads typically lack uniformity, diminishing the power of repetitive corporate advertising. Rivalry among brand managers may even escalate into unhealthy competition or deteriorate into secrecy and jealousy.

*SOURCE: CONTEMPORARY ADVERTISING 11TH ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIRGOLD, CHRISTIAN ARENS, PGS. 103-106*

END

National

Local

Focus

Brand

Market share

Strategies

Markets

Point

Volume, gross sales

Tactics

Customers

Time

Long-term campaigns

Sort-term ads

Resources

$5-$10 million+

Many specialists

Less than $1 million

A few generalists

How To Advertise: An Analysis of Contemporary Advertising (part 8)

Local Advertising: Where the Action Is

by

Charles Lamson

Not long after graduating from San Diego State, Ralph Rubio opened his first Mexican restaurant. He offered an unusual specialty: fish tacos---lightly battered and fried whitefish served in soft-shelled corn tortillas with white sauce, salsa, cabbage, and a wedge of lime. At the time, very few other Mexican eateries offered fish tacos, and none featured them. So Rubio found fish tacos hard to sell, even with his secret batter recipe (which he'd gotten from a street vendor in San Felipe, Mexico). The first month's sales at the restaurant averaged only $163 a day.

Rubio started using small newspaper ads with coupons to lure courageous customers. It worked. As business picked up, he expanded his advertising to radio and TV, targeting his market further with ads on Hispanic stations (whose listeners knew what fish tacos were). And he went after younger venturesome customers aged 18-34 by advertising at local movie theatres. Business picked up some more. Rubio soon opened another restaurant, and then another.

With each new opening, Rubio distributed direct mail flyers in the area and took free samples to nearby stores. Working with an artist, he created a cartoon character named Pesky Pescado based on the fish taco. He purchased a 15-foot inflatable Pesky to display at his restaurants. Employee T-shirts sported Pesky's picture and Rubio sold Pesky T-shirts and sweatshirts to enthusiastic patrons. He also offered bumper stickers and antennae balls to add some fun to his promotions. To further integrate his activities, Rubio took an active part in community affairs, including tie-ins with a blood bank, a literacy program, and fund-raising activities for both a Tijuana medical clinic and a local university's athletic program.

As the popularity of the fish taco grew, so did Rubio's revenues, doubling every year for the first five years. He trademarked the phrase "Rubio's, Home of the Fish Taco," and a local restaurant critic, commenting on things San Diegans could not do without, called fish tacos "the food San Diegans would miss the most." After 19 years, Rubio had 137 restaurants in 5 states. Together they produced more than $112 million in annual sales. And by the year 2004, Rubio's had served more than 50 million fish tacos.

Every year, advertisers spend billions of dollars in the United States. Almost half of that is spent on local advertising by local businesses in a particular city or county targeting customers in their geographic area.

Local advertising is sometimes called retail advertising because so much is placed by retail stores. But retail advertising is not always local; Sears and JCPenny advertise nationally. And many businesses besides retail stores use local advertising: banks, real estate developers, movie theatres, auto mechanics, plumbers, radio and TV stations, funeral homes, museums, and local politicians,  to name a few.

Local advertising is critically important because most consumer sales are made (or lost) locally. An auto manufacturer may spend millions advertising new cars nationwide, but if dealers do not make a strong effort locally, the dollars will be wasted. When it comes to making the sale and dealing with customers, local advertising is where the action is---where relationships often start and truly develop.

Types of Local Advertisers

There are four main types of local advertisers:

1. Dealers or local franchisees of national companies that specialize in one main product line (Honda, Wendy's, Mail Boxes Etc., Kinko's, H&R Block).
2. Stores that sell a variety of branded merchandise, usually on a nonexclusive basis (convenience, grocery, and department stores).
3. Specialty businesses and services (banks, insurance brokers, restaurants, music stores, shoe repair shops, remodeling contractors, florists, hair salons, travel agencies, attorneys, accountants).
4. Governmental, quasigovernmental, and nonprofit organizations (municipalities, utility companies, charities, arts organizations, political candidates).

A small local business---say, a hardware, clothing, or electronics store---may have just one person in charge of advertising. That person, the advertising manager, performs all the administrative, planning, budgeting, and coordinating functions. He or she may lay out ads, write ad copy, and select the media. A manager with some artistic talent may even design the actual ads and produce them on a desktop computer.

A chain store often maintains a completely staffed advertising department to handle production, media placement, and marketing support services. The department needs artists, copywriters, and production specialists. The department head usually reports to a vice president or marketing manager.

Types of Local Advertising

Most of the ads placed in local media are product, institutional, or classified advertising. Each type serves a different purpose.

 Product advertising     Product advertising promotes a specific product or service and stimulates short-term action while building awareness of the business. Three major types of product ads are used by local advertisers: regular price-line, sale, and clearance. Regular price-line advertising informs consumers about services or merchandise offered at regular prices. An accounting firm might use regular price-line advertising to promote its accounting and tax services.

To stimulate sales of particular merchandise or increase store traffic, local merchants occasionally use sale advertising, placing items on sale and offering two-for-one specials or other deals. Local advertisers use clearance advertising (a special form of sale advertising) to make room for new product lines or new models and to get rid of slow-moving lines, floor samples, broken or distressed merchandise, or out-of-season items. Companies going out of business also use clearance advertising.

Institutional advertising     Institutional advertising attempts to create a favorable long-term perception of the business as a whole, not just of a particular product or service. Many types of businesses (stores, restaurants, banks, professional firms, hospitals) use institutional advertising to promote an idea about the company and build long-term goodwill. It makes the public aware of what the business stands for and attempts to build reputation and image. An institutional ad might focus on convenient hours, a new credit policy, store expansion, or company philosophy.

Although readership is often lower, effective institutional ads build a favorable image for the business, attract new customers, and encourage customer loyalty.

Classified advertising     Advertisers use classified advertising in the newspaper for a variety of reasons: to locate and recruit new employees, offer services (such as those of an employment agency or business opportunity broker), or sell or lease new and used merchandise (such as cars, real estate, and office equipment).

Local Advertisers: The Original Integrators

When Ralph Rubio built his restaurant business, his promotional activities involved a lot more than just running ads in the media. In fact he did everything he could to develop a relationship with his customers and to promote a good word-of-mouth reputation. That meant using publicity, sales promotion, and direct response as well as media advertising---all integrated with consistently good food, reasonable prices, and excellent service. This combination constitutes integrated marketing communications (IMC)---joining together in a consistent manner everything that communicates with customers. Thanks to IMC, Rubio's fish taco became a local staple.

Local advertisers and the local agencies that serve them are not stuck with the traditional national view that advertising means "ads placed in the media." By necessity, local advertisers wear many hats every day. They tend the cash register, deal with customers, prepare mailers, write and place ads, evaluate suppliers' trade promotions, answer phone inquiries, spruce up the office, talk to newspaper editors, and coordinate the graphics on premiums for a seasonal promotion. By successfully combining personal selling with media advertising, direct marketing, sales promotion, and public relations, the local advertiser can be the consummate integrator of marketing communications.

Creating Local Advertising

Cal Worthington first pitched his car dealership on Los Angeles TV stations in 1951, and over 50 years later, he is still at it. He sponsors third-rate movies on late-night and Saturday afternoon TV. In his zany ads, he often appears in cowboy garb with a variety of domesticated wild animals, all introduced as "my dog Spot." Some low-budget, do-it-yourself advertisers like Worthington are so successful they engender a near-cult following. Others who try the same approach fail miserably.

In print advertising, many local advertisers achieve remarkable success with what professionals would call a schlock approach---heavy bold type, items crowded into ad space, loud headlines, and unsophisticated graphic design. If the message is honest, consistent, and effective and meets the advertisers objectives, that may be all that matters. To direct and control the creative aspects of their ads and commercials and ensure consistency, local advertisers should develop a checklist of creative do's and don'ts.

Finding big ideas for local ad campaigns can be extremely difficult. Some advertisers look to the merchandise for ideas; others look to the customer. An important goal for local advertisers is to achieve a consistent, distinctive look that makes their ads both appealing and identifiable. Local advertisers can  turn to a number of sources for creative help, including reps from the local media, local ad agencies, freelancers and consultants, creative boutiques, syndicated art services and the cooperative advertising programs of wholesalers, manufacturers, and trade associations.

Cooperative Advertising

As a service  to their distributors and dealers, and to ensure proper reproduction of their products, wholesalers and manufacturers as well as some trade associations often provide local advertisers with ready-made advertising materials and cooperative advertising programs where the costs are shared.

There are two key purposes for cooperative (co-op) advertising: to build the manufacturers brand image and to help its distributors, dealers, or retailers make more sales. Every year, national manufacturers give their local retailers more than $60 billion for co-op projects. Newspapers, network and cable TV, and radio are the favored media of co-op spending, with newspapers claiming 55 percent of co-op dollars. Intel alone spends more than $800 million annually to help PC marketers who display the "Intel Inside" logo. In addition to the usual co-op marketing media, Intel wants its retail partners to be able to use billboard, transit, cinema, and direct mail advertising.

In vertical cooperative advertising, the manufacturer provides the complete ad and shares the cost of the advertising time or space. The local newspaper sets the name and address of the local advertiser, or the radio station adds a tagline with the advertisers name, address, and phone number. Bridgestone makes vertical co-op advertising even more customizable for its retailers. With the help of Copyco, it developed templates for newspaper ads, flyers, and point-of-sale (POS) materials that retail managers can download and edit to fit their needs. After only a few minutes of training on the program, dealers without any graphic design experience can create local advertising that looks as polished as national advertising.

With horizontal cooperative advertising, firms in the same business (real estate agents, insurance agents, pharmacies, car dealers, or travel agents) or in the same part of town advertise jointly. Competing auto dealers, for example, might pool their dollars to advertise their common retail area as the "Mile of Cars."

*SOURCE: CONTEMPORARY ADVERTISING 11TH ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIGOLD, CHRISTIAN ARENS, PGS. 99-103*

END

How To Advertise: An Analysis of Contemporary Advertising (part 7)

The U.S. Federal Trade Commission

by

Charles Lamson

In the United States, the Federal Trade Commission (FTC) is the major regulator of advertising for products sold in interstate commerce. Established by an act of Congress, the FTC has a mission of ensuring "that the nation's markets function competitively, and are vigorous, efficient, and free of undue restrictions." The commission enforces a variety of federal antitrust and consumer protection laws and works to enhance the operation of the marketplace by eliminating acts or practices that are deceptive or unfair. In other words, it is the FTC's responsibility to maintain the existence of many sellers in the marketplace, strive to provide more complete information to consumers, and keep the marketing process as free of externalities (a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey) as possible.

Defining Deception

The FTC defines deceptive advertising as any ad that contains a misrepresentation, omission or other practice that can mislead a significant number of reasonable consumers to their detriment. Proof that consumers were deceived is not required, and the representation may be either expressed or implied. The issue is whether the ad conveys a false impression---even if it is literally true.

Take the case of the FTC against Office Depot, Buy.com, and Value America. According to the FTC, the companies engaged in deceptive practices in advertising "free" and "low-cost" personal computer (PC) systems because they failed to adequately disclose the true costs and important restrictions on the offers. The low cost of the PCs was tied to rebates that were conditioned on the purpose of long-term Internet service contracts.

While the companies' advertisements plugged low-cost, and in some cases, free computer systems, the true costs for the systems were far higher. For example, one ad featured a computer for $269. But the purchaser's actual expenses would exceed $1,000 when taking into account the cost of the the required three-year Internet service contract. The FTC said the restrictions and charges were inadequately disclosed or that they were disclosed in tiny print. And that amounted to deception.

Without admitting any wrongdoing, the companies all signed consent agreements, agreeing to disclose the information prominently in the future to help consumers easily determine the real costs of such deals.

The FTC is a powerful regulator. The commission cracked down on Exxon and ordered a groundbreaking educational campaign to inform consumers that the right octane for most cars is regular octane, not the more expensive premium grade. The FTC also looks at environmental claims such as biodegradable, degradable, photodegradable, and recyclable. To avoid confusing terminology, the FTC and the Environmental Protection Agency (EPA) worked jointly with attorneys general from many states to develop uniform national guidelines for environmental marketing claims.

Defining Unfairness

According to FTC policy, some ads that are not deceptive may still be considered unfair to consumers.Unfair advertising occurs when a consumer is "unjustifiably injured" or there is a "violation of public policy" (such as other government statutes). In other words, unfair advertising is due to the inadequacy of complete information or some other externality. For example, practices considered unfair are claims made without prior substantiation, claims that exploit various groups such as children and the elderly, and cases where the consumer cannot make a valid choice because the advertiser omits important information about the product or about competing products mentioned in the ad.

In one case, the FTC found that an automaker's failure to warn of a safety problem was not deceptive but was unfair. Advertising organizations have argued that the word unfair is so vague it can mean whatever any given individual wants it to. They have lobbied Congress to eliminate the FTC's power to prosecute on unfairness grounds, and Congress to eliminate the FTC's power to prosecute on unfairness grounds, and Congress did pass a compromise bill requiring the FTC to show that (1) an alleged unfair practice involves substantial, unavoidable injury to consumers; (2) the injury is not reasonably avoidable by consumers themselves; and (3) the injury is not outweighed by benefits to consumers or competition. This legislation suggests that in the future, the FTC will have to balance on a far narrower beam in its effort to regulate unfairness.

Comparative Advertising

Advertisers use comparative advertising to claim superiority to competitors in some aspect. In the United States, such ads are legal (and encouraged by the FTC) so long as the comparison is truthful. In fact, the FTC cracked down on the Arizona Automobile Dealers Association for restricting truthful, nondeceptive comparative price advertising among its members.

In 1994, the AADA's 199 members constituted 99 percent of the new automobile and truck dealers in Arizona. The FTC challenged the association's Standards for Advertising Motor Vehicles, which, among other things, prohibited members from advertising that prices are equal to or lower than a competitor's or are the lowest; that the advertiser will match or beat any price; or that the advertiser will offer compensation if it cannot offer an equal or lower price.

These prohibitions, according to the FTC, unreasonably restrained competition among the member dealers and  injured consumers by depriving them of truthful information concerning the prices and financing available for new cars and trucks.

The 1988 Trademark Law Revision Act closed a loophole in the Lanham Act, which governed comparison ads but did not mention misrepresenting another company's product. Under current law, any adviser that misrepresents its own or another firm's goods, services, or activities is vulnerable to a civil action.

In addition to being truthful, comparative ads must compare some objectively measurable characteristic. And great scrutiny must be given to the substantiation. Given the potential for sizable damages---for faulty comparative advertising, the greatest care must be exercised in this area.

Investigating Suspected Violations

If it receives complaints from consumers, competitors, or its own staff members who monitor ads in various media, the FTC may decide to investigate an advertiser. The agency has broad powers to pursue suspected violators and demand information from them. Typically, the FTC looks for three kinds of information: substantiation, endorsements, and affirmative disclosures.

If a suspected violator cites survey findings or scientific studies, the FTC may ask for substantiation. Advertisers are expected to have supporting data before running an ad, although the FTC sometimes allows postclaim evidence. The FTC does not solicit substantiation for ads it is not investigating.

The FTC also scrutinizes ads that contain questionable endorsements or testimonials. If a noncelebrity endorser is paid, the ad must disclose this on-screen. The endorsers may not make claims the advertiser cannot substantiate. Further, celebrity endorsers must actually use the product or service (if portrayed), and they can be held personally liable if they misrepresent it.

Advertisers must make affirmative disclosure of their product's limitations or deficiencies: for example, EPA mileage ratings for cars, pesticide warnings, and statements that saccharin may be hazardous to one's health.

Remedies for Unfair or Deceptive Advertising

When the FTC determines that an ad is deceptive or unfair, it may take three courses of action: negotiate with the advertiser for a consent decree, issue a cease-and-desist order, and/or require corrective advertising.

A consent decree is a document the advertiser signs agreeing to stop the objectionable advertising without admitting any wrongdoing. Before signing, the advertiser can negotiate specific directives with the FTC that will govern future advertising claims.

If an advertiser will not sign a consent decree, the FTC may issue a cease-and-desist order prohibiting further use of the ad. Before the order is final, it is heard by an administrative law judge. Most advertisers sign the consent decree after the hearing and agree, without admitting guilt, to halt the advertising. Advertisers that violate either a consent decree or a cease-and-desist or can be fined up to $11,000 per showing of the offending ad.

The FTC may also require corrective advertising for some period of time to explain and correct offending ads. In 1999 the FTC ruled that pharmaceutical giant Novartis advertised without substantiation that its Doan's Pills brand was more effective against back pain than its rivals. Because the deceptive advertising had gone on for more than nine years, the FTC ordered Novartis to run $8 million worth of corrective advertising. The advertising was to include this statement: "Although Doan's is an effective pain reliever, there is no evidence that Doan's is more effective than other pain relievers for back pain" The FTC also ordered Novartis to place the statement on Doan's packaging for a year.

To help advertisers avoid such an expense, the FTC will review advertising before it runs and give "advance clearance" in an advisory opinion. It also publishes Industry Guides and Trade Regulation Rules, which gives advertisers, agencies, and the media ongoing information about FTC regulations.

In Canada, the laws are even tougher and the consequences stiffer. It is an offense for any public promotion to be "false or misleading in a material respect." It is not necessary that anyone be misled by the representation, only that it be false. An offense is a crime. If convicted, an advertiser or agency executive could go to jail for up to five years, pay a fine, or both.

*SOURCE: CONTEMPORARY ADVERTISING, 25TH ANNIVERSARY ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIGOLD, CHRISTIAN ARENS, PGS. 81-84*

END

How To Advertise: An Analysis of Contemporary Advertising (part 6)

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The Economic Impact of Advertising

by

Charles Lamson

Effect on the Value of Products

Why do most people prefer Coca-Cola to some other cola? Why do some people prefer Ambercrombie & Fitch khakis to some other unadvertised brand? Are the advertised products functionally better? Not necessarily, but in the mind of the consumer, advertising has given these brands added value.

In the mid-1960s, a famous psychologist named Ernest Dichter asserted that a product's image, created in part by advertising and promotion, is an inherent part of the product itself. Subsequent studies showed that while an ad may not address a product's quality directly, the positive image conveyed by advertising may imply quality. Moreover, by simply making the product better known, advertising can make the product more desirable to the consumer. In these ways, advertising adds value to the brand. That is why people pay more for Bufferin than an unadvertised brand displayed right next to it---even though all buffered aspirin, by law, is functionally the same.

Advertising also adds value to a brand by educating customers about new uses for a product. Kleenex was originally advertised as a makeup remover, later as a disposable handkerchief. AT&T first promoted the telephone as a necessity and later as a convenience.

One advantage of the free-market system is that consumers can chose the values they want in the products they buy. If, for example, low price is important, they can buy an inexpensive economy car. If status and luxury are important, they can buy a fancy sedan or racy sports car. Many of our wants are emotional, social, or psychological rather than functional. One way we communicate who we are (or want to be) is through the products we purchase and display. By associating the product with some desirable image, advertising offers people the opportunity to satisfy those psychic or symbolic wants and needs.

In terms of our economic framework, by adding value to products, advertising contributes to self-interest---for both the consumer and the advertiser. It also contributes to the number of sellers. That increases competition, which also serves the consumer's self-interest.

Effect on Prices

If advertising adds value to products, it follows that advertising also adds cost, right? And if companies stopped all that expensive advertising, products would cost less, right?

Wrong.

Some advertised products do cost more than unadvertised products, but the opposite is also true. Both, the Federal Trade Commission and the Supreme Court have ruled, that by encouraging competition, advertising has the effect of keeping prices down. That again serves the consumer's self-interest. And that is why professionals such as attorneys and physicians are now allowed to advertise.

Sweeping statements about advertising's positive or negative effect on prices are likely to be too simplistic. We can make some important points, though:

• As one of the many costs of doing business, advertising is indeed paid for by the consumer who buys the product. In most product categories, though, the amount spent on advertising is usually very small compared with the total cost of the production.
• Advertising is one element of the mass distribution system that enables many manufacturers to engage in mass production, which in turn lowers the unit cost of products. These savings can then be passed on to consumers in the form of lower prices. In this indirect way, advertising helps lower prices.
• In industries subject to government price regulation (agriculture, utilities), advertising has historically had no effect on prices. In the 1980s, though, the government deregulated many of these industries in an effort to restore free-market pressures on prices. In these cases, advertising has affected price---usually downward, but not always.
• In retailing, price is a prominent element in many ads, so advertising tends to hold prices down. On the other hand, national manufacturers use advertising to stress features that make their brands better, in these cases advertising tends to support higher prices for their brands.

Effect on Competition

Some observers believe advertising actually restricts competition because small companies or industry newcomers cannot compete with the immense advertising budgets of large firms.

It is true that intense competition does tend to reduce the number of businesses in an industry. However, some of the firms eliminated by competition may be those that served customers least effectively. In other cases, competition is reduced because of mergers and acquisitions (big companies working in their own self-interest).

High costs may inhibit the entry of new competitors in industries that spend heavily on advertising. In some markets, the original brands probably benefit greatly from this barrier. However, the investments needed for plants, machinery, and labor are of far greater significance. These are typically the real barriers to entry, not advertising.

Advertising by big companies often has only a limited effect on small businesses because a single advertiser is rarely large enough to dominate the whole country. Regional oil companies, for example, compete very successfully with national oil companies on the local level. In fact, the freedom to advertise encourages more sellers to enter the market. And we have all seen nonadvertised store brands of food compete very effectively with nationally advertised brands on the same grocery shelves.

Effect on Consumer Demand

The question of advertising's effect on total consumer demand is extremely complex. Numerous studies show that promotional activity does affect aggregate consumption, but they disagree as to the extent. Many social and economic forces, including technological advances, the population's educational level, increases in population and income, and revolutionary changes in lifestyle, are more significant. For example, the demand for MP3 players, cellular phones and broadband Internet service expanded at a tremendous rate, thanks in part to advertising but more to favorable market conditions. At the same time, advertising has not reversed declining sales of such items as hats, fur coats, and manual typewriters.

Advertising can help get new products off the ground by giving more people more complete information, thereby stimulating primary demand---demand for the entire product class. In declining markets, when the only information people want is price information, advertising can influence selective demand---demand for a particular brand. But the only effect it will have on primary demand is to slow the rate of decline. In growing markets, advertisers generally compete for shares of that growth. In mature, static, or declining  markets, they compete for each other's shares---conquest sales.

Effect on Consumer Choice

For manufacturers, the best way to beat the competition is to make their product different. For example, look at the long list of car models, sizes, colors, and features designed to attract different buyers. And grocery shelves may carry more than 100 different brands of breakfast cereals---something for everybody.

The freedom to advertise encourages businesses to create new brands and improve old ones. When one brand reaches market dominance, smaller brands may disappear for a time. But the moment a better product comes along and is advertised skillfully, the dominant brand loses out to the newer, better product. Once again, the freedom to advertise promotes the existence of more sellers, and that gives consumers wider choices.

Effect on the Business Cycle

The relationship between advertising and gross domestic product has long been debated. John Kenneth Galbraith, a perennial critic of advertising, concedes that by helping to maintain the flow of consumer demand (encouraging more buyers), advertising helps sustain employment and income. But he maintains that, despite declines in the value of the dollar, the U.S. trade deficit persists because advertising and marketing activities create consumer preference for certain foreign products.

Historically, when business cycles dip, companies cut advertising expenditures. That may help short-term profits, but studies prove that businesses that continue to invest in advertising during a recession are better able to protect, and sometimes build, market shares. However, no study has shown that if everybody just keeps advertising, the recessionary cycle will turn around. We conclude that when business cycles are up, advertising contributes to the increase. When business cycles are down, advertising may act as a stabilizing force by encouraging more buyers to buy.

The Abundance Principle: The Economic Impact of Advertising in Perspective

To individual businesses such as Abercrombie & Fitch, the local car dealer, and the convenience store on the corner, advertising pays back more than it costs. If advertising did not pay, no one would use it. And the various news and entertainment media that depend on advertising for financial support would go out of business.

Advertising costs less for the customer than most people think. The cost of a bottle of Coke includes about a penny for advertising. And the $20,000 price tag on a new car usually includes a manufacturer's advertising cost of less than $400.

To the economy as a whole, the importance of advertising may best be demonstrated by the abundance principle. This states that in an economy that produces more goods and services that can be consumed, advertising serves two important purposes: It keeps consumers informed of their alternatives (complete information), and it allows companies to compete more effectively for consumer dollars (self-interest). In North America alone, the U.S. and Canadian economies produce an enormous selection of products. Most supermarkets carry more than 30,000 different items. Each carmaker markets dozens of models. And many suppliers compete for the consumer dollar. This competition generally results in more and better products at similar or lower prices.

Advertising stimulates competition (many buyers and sellers). In countries where consumers have more income to spend after their physical needs are satisfied, advertising also stimulates innovation and new products. However, no amount of advertising can achieve long-term acceptance for products that do not meet consumer approval. Despite massive advertising expenditures, fewer than a dozen of  the 50 best-known cars developed in the 20th century are still sold today.

Advertising stimulates a healthy economy. It also helps create financially healthy consumers who are more informed, better educated, and more demanding. As a result, consumers now demand that manufacturers be held accountable for their advertising. This has led to an unprecedented level of social criticism and legal regulation.

*SOURCE: CONTEMPORARY ADVERTISING, 25TH ANNIVERSARY ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIGOLD, CHRISTIAN ARENS, PGS. 58-62*

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