Monday, November 7, 2011

Advertisement is an Investment, Not Expenditure - GEC Business Review

Well, it’s a million dollar question particularly for those conservative-cum-old fashion business owners or managers. Often, advertisement is considered as expenditure. Some broiling questions like “How much we need to spend”, “Can we spend less than 3% based on total projected sales?” and other concerning matters that have put them in advertising dilemma.

In todays’ heavily brand-driven business environment, advertising budget should be considered as part of a brand investment rather than considering it as expenditure. In fact, such investment helps developing and strengthening your brand in short- and long-term, if it’s advertised (or invested) effectively.

So, isn’t it “unfortunate” to consider advertising as expenditure, but not investment? Let’s dissect the issue a bit further.

First, should advertising investment be considered as advertising expenditure/cost (like any other costs, fixed or variables) is to be passed on to the consumer? Or, should advertisement be considered as an investment by your company (for a brand) which helps increasing your brand strengths, sales and market share eventually, resulting in economies of scale which either reduces the overall cost of investment or increases the brand values to your customers, partners, shareholders and employees.

An unfortunate Pricing Example:
Product cost = Cost of Goods Sold + Direct/Indirect Costs + Manufacturing Costs + Advertising Costs

Frankly, it’s weird that advertising cost is taken into account in determining a product’s price. As a general rule of thumb, pricing methodology covers both direct/indirect cost and manufacturing costs. Advertising investment should not be included as the “returns” – brand contributions (ensued from advertisement) are expected to provide surplus (or incremental sales) towards covering direct/indirect costs.

Having said that, advertising investment is not a cost in the same manner as fixed or variable costs or any other attributable overheads, but measured as a long-term investment in your brand on which the brand must generate “returns”.

In sum, “returns” should be a matter to deal with when it comes to investment in advertisements. It’s all about the potential returns from the (advertisement) investment, where (a) brands strengths (ensued from brand exposure), (b) sales (ensued from product/brand exposure), and (c) market share (ensued from product exposure) are factors that to be achieved.

As far as advertisement is concerned, expenditure ... is irrelevant!

Courtesy of Marketing Channel

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