Advertising Promotion and other

aspects of Integrated Marketing

Communications 10th Edition Andrews
Solutions Manual
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 OVERVIEW OF ADVERTISING MANAGEMENT
Chapter 9

Chapter Objectives
After reading this chapter, you should be able to:
1. Understand the magnitude of advertising and the percentage of sales revenue companies
invest in this marcom tool.
2. Appreciate that advertising can be extraordinarily effective but that there is risk and
uncertainty when investing in this practice.
3. Discuss advertising’s effect on the economy including resolving the advertising = market
power and advertising = information viewpoints.
4. Recognize the various functions that advertising performs.
5. Explore the advertising management process from the perspective of clients and their
agencies.
6. Understand the functions agencies perform and how they are compensated.
7. Explore the issue of when investing in advertising is warranted and when disinvesting is
justified.
8. Examine advertising elasticity as a means for understanding the contention that “strong
advertising is a deposit in the brand equity bank.”

Chapter Overview
This chapter presents an introduction to the fundamentals of advertising management. The first
section looks at the magnitude of advertising in the United States and elsewhere and discusses
the concept of advertising-to-sales ratios and advertising's effect on the economy. Five functions
of advertising are discussed: (1) informing, (2) influencing, (3) reminding and increasing
salience, (4) adding value, and (5) assisting other company efforts. The next section covers the
advertising management process from the client perspective and the role of advertising agencies.
Advertising strategy formulation involves setting objectives, devising budgets, message creation,
and media strategy. Message strategies and decisions most often are the joint enterprise of the
companies that advertise and their advertising agencies, and advertisers have three alternatives:
(1) in-house advertising operation, (2) purchase advertising services as needed, or (3) use a full-
service advertising agency. Each alternative has its own advantages and disadvantages.
Functions of full-services agencies include creative services, media services, research services,
and account management. Agencies are compensated through three basic methods: (1)
commissions from media, (2) labor-based fee system, or (3) outcome- or performance-based
programs. The final section of the chapter discusses ad-investment considerations and presents
the case for investing in advertising and the case for disinvesting. A discussion of advertising
versus pricing elasticity follows with four situations based on the possible combinations of both,
with suggestions for either reducing price, increasing advertising, doing both, or doing neither.
Finally, the relationship between ad spending, advertising elasticity, and share of market is
briefly covered.

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
 Overview of Advertising Management

Chapter Outline

Marcom Insight
The Story of “Mad Man,” the “Elvis of Advertising”
Alex Bogusky is known as Mad Man and the Elvis of Advertising. He was a creative director
and principal of the ad agency Crispin, Porter, + Bogusky. CP + B’s success was in part
attributed to its four non-traditional principles: (1) get close to client’s customers, (2) fire clients
if the match isn’t good, (3) be media neutral, and (4) risky is good. Bogusky left CP + B and now
works on a project called the Fearless Revolution. In 2010, he launched COMMON, a social
network for social ventures.

9-1 Introduction
This chapter introduces the first major IMC tool, advertising, and presents the
fundamentals of advertising management. Advertising is a paid, mediated form of
communication from an identifiable source, designed to persuade the receiver to take
some action, now or in the future. Figure 9.1 shows examples of the use of humor in B2B
advertising.

9-2 The Magnitude of Advertising

Total advertising expenditures in the U.S. were estimated to exceed $204 billion in 2016.
Table 9.1 shows the top 25 spenders in U.S. advertising.

9-2a Advertising-to-Sales Ratios

Table 9.2 presents advertising-to-sales ratios for various companies in select
product categories. The ad-to-sales ratio can range from a low of less than 0.1
percent to a high of 60 percent.

9-2b Advertising Effects Are Uncertain

Many companies are aware that consistent investment spending is the key factor
underlying successful advertising.

9-3 Advertising’s Effect on the Economy

There are two divergent thoughts on advertising’s economic role. One is that advertising
equals market power and the other is that advertising equals information. Table 9.3
summarizes these two perspectives.

9-3a Advertising = Market Power

This perspective states that advertising yields market power in being able to
differentiate physically homogenous products.

9-3b Advertising = Information

This perspective is more positive and argues that by informing consumers about
product benefits, advertising increases consumer price sensitivity and their ability
to obtain the best value.

9-3c A Synthesis

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 9

Neither view is correct by itself.

9-4 Advertising Functions

Advertising performs five critical functions: (1) informing, (2) influencing, (3) reminding
and increasing salience, (4) adding value, and (5) assisting other company efforts.

9-4a Informing
Advertising makes consumers aware of new brands, educates them about a
brand’s distinct features and benefits, and facilitates the creation of positive brand
images. It achieves this largely by increasing consumers' top-of-mind awareness
(TOPA).

9-4b Influencing
Advertising influences prospective customers to try advertised products by
stimulating primary demand—demand for the entire product category, or
secondary demand—demand for a specific company’s brand.

9-4c Reminding and Increasing Salience

Advertising keeps a company’s brand fresh in the consumer’s memory. It makes a
brand more salient by enriching the memory trace for the brand. Effective
advertising also increases the consumer’s interest in mature brands and thus the
likelihood of purchasing brands that otherwise might not be chosen.

9-4d Adding Value

There are three basic ways by which companies can add value to their offerings:
innovating, improving quality, and altering consumer perceptions. Advertising
adds value by influencing perceptions. By making a brand more valuable,
advertising generates incremental discounted cash flow (DCF).

9-4e Assisting Other Company Efforts

Advertising’s primary role is at times to facilitate other marcom efforts (e.g., used
as a vehicle to deliver coupons and sweepstakes or assist sales representatives).

9-5 The Advertising Management Process

Advertising management can be thought of as the process of creating ad messages,
selecting media in which to place the ads, and measuring the effects of the advertising
efforts: messages, media, and measurement.

9-5a Managing the Advertising Process: The Client Perspective

Figure 9.2 illustrates the advertising management process, which consists of three
sets of interrelated activities: advertising strategy, strategy implementation, and
assessing ad effectiveness.
Formulating and Implementing Advertising Strategy
Advertising strategy involves four major activities which are setting objectives,
devising budgets, creating messages, and devising media strategy.
Implementing Advertising Strategy

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
 Overview of Advertising Management

Strategy implementation deals with the tactical, day-to-day activities of an ad

campaign.
Measuring Advertising Effectiveness
Only by evaluating results is it possible to determine whether objectives are being
accomplished.

9-5b The Role of Advertising Agencies

Table 9.4 lists the top 25 advertising agency networks in the world according to
revenue. Brands can manage advertising by doing it in-house, hiring services as
needed from an agency, or working full-service with an agency. Full-service
agencies perform at least four basic functions.
Creative Services
Agencies have staffs of copywriters, graphic artists, and creative directors who
create advertising copy and visualizations.
Media Services
Media services includes developing the best media plan for reach, frequency, and
budget objectives. Media buyers then procure specific vehicles within particular
media that have been selected by media planners and approved by clients.
Research Services
In full-service agencies, research specialists study customer buying habits,
purchase preferences, and responsiveness to ads. They use a variety of research
methods. These specialists are often referred to as account planners.
Account Management
Account managers provide the mechanism to link the agency with the client.

9-5c Agency Compensation

There are three basic methods of compensation: (1) receiving commissions from
media, (2) being compensated based on a fee system, and (3) earning
compensation based on performance outcomes. Commissions from media for
advertisements aired or printed on behalf of the agency’s clients provided the
primary form of ad agency compensation in the past. Historically, U.S. agencies
charged a standard commission of 15 percent of the gross amount of the billings.
Labor-based fee system is similar to the method used by lawyers and consultants.
Advertising agencies monitor time and bill on an hourly basis. Outcome- or
performance-based programs now represent the most common approach to
agency compensation and are tied to brand performance goals. This system
encourages, indeed demands, agencies to use whatever IMC programs are needed
to build brand sales.

9-6 Ad-Investment Considerations

When is it justifiable to invest in advertising and when is it appropriate to disinvest?
Three equations put it into focus:
• Profit = Revenue − Expenses (Equation 9.1)
• Revenue = Price  Volume (Equation 9.2)
• Volume = Trial + Repeat (Equation 9.3)

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 9

Whether one chooses to invest or disinvest in advertising depends largely on expectations

about how advertising will influence a brand’s sales volume and revenue.

9-6a The Case for Investing in Advertising

In terms of profitability, investing in advertising is justified only if the
incremental revenue generated from the advertising exceeds the advertising
expense.

9-6b The Case for Disinvesting

The implicit assumption is that revenue will not be affected adversely when ad
budgets are diminished, but this assumption is somewhat illogical.

9-6c Which Position Is More Acceptable?

The profit effect of reducing advertising expenses is relatively certain—for every
dollar not invested in advertising, there is a dollar increase in short-term profit
(assuming that reduction in advertising does not adversely affect revenue).

A Deposit in the Brand Equity Bank

The reason marketers continue to invest in advertising, even during economic
downturns, is because they believe that advertising will enhance a brand’s equity
and increase sales. However, it must be strong advertising that is different,
relevant, held in high esteem, and memorable.

Advertising Versus Pricing Elasticity

Two alternative ways brand managers can grow a brand’s sales: (1) increasing
advertising or (2) reducing price. Elasticity is a measure of how responsive
demand for a brand is to changes in marketing variables such as price and
advertising. Elasticity coefficients can be calculated based on Equation 9.4 and
Equation 9.5.
• EP = Percentage change in quantity demanded  Percentage change in price
(Equation 9.4)
• EA = Percentage change in quantity demanded  Percentage change in
advertising (Equation 9.5)
The law of inverse demand says that sales volume, or quantity, typically increases
when prices are reduced, and vice versa.
Average Price and Advertising Elasticities – an interesting question is whether
increases in advertising can be justified, especially when compared with the
alternative possibility of reducing prices.
What’s a Manager to Do? – in general, we can consider four combinations of
advertising and price elasticities dictating whether prices should be lowered or
advertising increased:
• Maintain the status quo. This is a situation where consumers have well-
established brand preferences such as during the decline stage of a
product’s life cycle or in established niches. Since demand would not be
very price elastic or advertising elastic, profits would be maximized by
maintaining the present price and advertising levels.

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part.
 Overview of Advertising Management

• Build image via increased advertising. In a situation where demand is

more advertising elastic than price elastic, it makes sense to increase
advertising to build brand image (likely for new products, status products,
and symbolic imagery products).
• Grow volume via price discounting. In a situation where consumers have
complete information about brands and brand switching is frequent, the
market is more price than advertising elastic.
• Increase advertising and/or discount prices. In this situation the market is
both price and advertising elastic, such as with brands that can be
differentiated or that are seasonal (customers may need to be reminded to
fertilize in the spring, and may use price comparisons when shopping).

Ad Spending, Advertising Elasticity, and Share of Market

The effect of advertising for a brand on its sales volume, revenue, and market
share is determined by how much it spends relative to other brands in the category
(i.e., its share of voice, or SOV) and the effectiveness of its advertising (i.e., how
strong the advertising is). Advertising elasticity is a measure of advertising
strength. As shown in Equation 9.6, a brand’s share of market (SOM) depends on
its level of advertising raised to the power of its advertising elasticity in
comparison to the total level of advertising for all brands in the category raised to
the power of their elasticity coefficients. Table 9.5 presents real data for the top
10 U.S. beer brands as a basis for illustrating advertising elasticity and the
concept of strength.

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 9

MindTap Resources
MindTap® is a digital learning solution that helps students improve retention and critical thinking
skills by customizing learning experiences, providing mobile access, and the ability to track
individual performance. It helps students better manage time and prepare more thoroughly for
exams, providing detail and context beyond classroom lectures.
MindTap Insights Online highlight the latest marketing and advertising developments. These
engaging features in MindTap draw students’ attention to a variety of brilliant ads that illustrate
key IMC concepts at work within real company situations.

MindTap support materials for Chapter 9 include:

• End-of-chapter quizzes reinforce the learning objectives and review the chapter
content.
• Videos and articles from Advertising Age keep students up-to-date with marketing
news and trends. Student explore the following topics in this chapter:
▪ FTC Cracking Down on Social Influencers’ Labeling of Paid Promotions
▪ Who’s Winning the Battle Between Paid and Earned Media?
• Insights Online explore real-world examples of concepts discussed in the chapter.
Topics for this chapter include:
▪ How Advertising and Sources Differ Across Global Regions
▪ Ad Blocking Software

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
 Overview of Advertising Management

Answers to Discussion Questions

1. Describe circumstances when each of the five advertising functions described in the chapter
might be more important than the others.

Answer:
The five functions are informing, influencing, reminding and adding salience, adding value,
and assisting other company efforts. Students should recognize that no one function is most
important in all circumstances. The relative importance of functions depends on a product’s
stage in the life cycle and the company’s objectives in advertising a product. Informing is
generally the most important function for new products, but the other functions increase in
importance as a product progresses through its life cycle.

2. Advertising is said to be “a deposit in the brand equity bank,” but only if the advertising is
“strong.” Explain.

Answer:
Brand equity is the set of positive associations around a brand leading to repeat loyalty and
purchase. Therefore, as advertising contributes to and maintains these positive associations,
brand equity is built and delivers a return on the advertising investment. However, the
investment does not return if customer loyalty is undermined by weak advertising and
competitive assaults on the brand loyal customers.

3. Even if an advertiser is willing to invest by advertising his/her brand online, they may face
consumers using ad blocking software. What options do you suggest for advertisers that face
this challenge?

Answer:
Students answers will vary, but should include viable solutions to address this dilemma.

4. Provide an example of usage expansion advertising other than those illustrated in the chapter.

Answer:
Student answers will vary. Two samples are aspirin and pork. Aspirin has been touted to help
prevent heart attacks and some forms of cancer if taken in small, daily doses. Pork, “the other
white meat,” is being advertised as an alternative to chicken.

5. Present arguments for and against using advertising agencies. Are there lessons to learn from
the experiences of Alex Bogusky (CP + B), featured in the Marcom Insight?

Answer:
Advertising agencies can provide great value to their clients by developing highly effective
and profitable advertising campaigns. One advantage of using some form of advertising
agency is that the advertiser does not have to employ an advertising staff and absorb the
overhead required to maintain the staff’s operations. By using the services of an agency, the
advertiser acquires the services of specialists with in-depth knowledge of advertising and

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 9

obtains negotiating leverage with the media. One disadvantage, though, is that some control
over the advertising function is lost when it is performed by an agency rather than in house.
This is clearly shown from the example of Bogusky’s work as an author while also involved
with CP + B clients.

6. Ad agency compensation is increasingly turning to performance- or outcome-based

compensation. Explain how this form of ad agency compensation works and why it
potentially is superior to alternative methods of compensating ad agencies.

Answer:
Outcome- or performance-based programs use a compensation system that is tied in some
way to sales. The agency’s compensation rises with sales increases and falls with declines.
This is potentially superior to alternative methods, such as the media commission system or
the labor-based fee system, because is encourages, indeed demands, agencies to use whatever
IMC programs are needed to build brand sales.

7. Using Equations 9.1 through 9.3, explain the various means by which advertising is capable
of influencing a brand’s profitability.

Answer:
Volume is the key: sales come from customers, and trial means bringing people new to the
brand through advertising and promotion, and repeat buyers are often loyal buyers whose
loyalty can be maintained with advertising. Furthermore, advertising and related promotional
activities can help move triers to loyal customers.

8. In the context of the discussion of price and advertising elasticities, four situations were
presented by comparing whether price or advertising elasticity is stronger. Situation 2 was
characterized as “build image via increased advertising.” In your own terms, explain why in
this situation it is more profitable to spend relatively more on advertising rather than reduce a
brand’s price.

Answer:
The three main product categories used are new products, luxury goods, and symbolic
imagery products. New products need customer awareness before a price decrease can even
have much effect, and awareness needs to be built through advertising. Furthermore, the
more complex the product, the more meaningless a price discount is to potential buyers if
they do not have product benefit knowledge. Luxury goods tend to attract people who are not
concerned about price, but are more interested in the benefits provided by the product.
Imagery goods are substantially psychological rather than functional, and associations with
these values and beliefs need to be built, reinforced, and maintained. Advertising can build
associations with perfumes and status products by showing certain types of customers and
usage situations.

9. Research results were presented showing that sales volume is about 14.6 times more
responsive, on average, to changes in price than to changes in advertising. Explain exactly

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part.
 Overview of Advertising Management

what this means for the brand manager of a brand who is considering whether to grow sales
by increasing advertising expenditures or lowering the price.

Answer:
The 14.6 value was obtained by dividing the price elasticity of 1.61 by the advertising
elasticity of 0.11 (i.e., 1.61  0.11 = 14.6). In this instance, a price elasticity of 1.61 means
that a one percent reduction in price leads to a 1.61 percent increase in sales volume. An ad
elasticity of 0.11 indicates that a one percent increase in ad expenditures increases volume by
only 0.11 percent. So, it can be seen that, in this situation, this brand is more responsive to
changes in price than to changes in advertising, so it would be wiser to reduce price than to
increase advertising expenditures.

10. Data in this same section indicated that nondurable goods (versus durables) are relatively
more responsive to price cuts than advertising increases. Offer an explanation for this
differential.

Answer:
Nondurable goods are purchased more frequently and at lower prices than durable goods.
Thus, consumers are more likely to purchase more of a nondurable good when the price is
reduced than they would if the price of a durable good is reduced (i.e., consumers don’t need
multiple computers, refrigerators, or automobiles).

11. Show your understanding of Equation 9.4 and the data presented in Table 9.5 by constructing
a spreadsheet (using, for example, Microsoft’s Excel) and altering the elasticity coefficients
for different beers. For example, just as MillerCoors’ elasticity coefficient was changed from
0.11 to 0.15 while holding all the others constant at 0.11, you may want to vary the
coefficient for, say, Heineken.

Answer:
Equation 9.4 indicates that a brand’s share of market (SOM) depends on its level of
advertising raised to the power of its advertising elasticity in comparison to the total level of
advertising for all brands in the category raised to the power of their elasticity coefficients.
The purpose of this exercise is to show how it is possible to translate the idea of advertising
“strength” into numerical values by capitalizing on the concept of advertising elasticity. In
the case of MillerCoors, whose elasticity coefficient was varied in the chapter example,
market share increased when its advertising elasticity was increased. The same result should
occur when doing this exercise for Heineken, but the effect should be lesser due to the lower
ad spend.

© 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.