One of the studies done on Marketing strategy involved a fantastic comparison of what happens when a firm advertises against what happens when it doesn’t. It also includes two other variables besides advertising, which are Price and quality.
The importance of advertising becomes clear when all these three variables are working in tandem. This is a really interesting study for small businesses and large corporate alike. It shows the importance of product quality as well as advertising and how these things affect the ROI and profitability of the firm.
Let us delve into each scenario separately.
1) Advertising vs price
Whenever the advertising levels were higher, the firm was able to keep a higher price for the product. And the product was selling at this higher price due to its perceived value. This perceived value was also built because of advertising. Thus, a higher budget of advertising, brought a higher price for the product. Vice versa, no exposure to advertising, kept the price low.
2) Quality vs Advertising vs price
The importance of advertising is showcased more when you bring in the other 2 variables – price and quality. There are many business owners in the market who think that quality is enough for the product to sell. However, this is not true.
For a product low in quality, the price is always low and hence ROI and profitability will be low also. But the product with high quality, is able to get by with a hefty price because of word of mouth and good will in the market. But the king is the product which has a good quality as well as a fantastic advertising budget.
The advertising part builds the foundation of the brand for the product. This, along with the good quality of the product, gives such a boost that the brand can keep the highest price in the market and still thrive in the market. Here, advertising is important to give the required boost to the brand.
3) Return on investments
There are many things which go into getting a good ROI for any brand or product. However, if we specifically talk about advertising and ROI, then firms with higher advertising exposure have higher ROI and firms with lesser advertising exposure give lesser ROI.
Advertising in itself is an expenditure, and not an investment as the ROI of advertising is difficult to be extrapolated. But, the ROI is determined by the higher price of the product which can be kept due to advertising, as well as the push in sales that is observed due to rising brand equity.
4) Product life cycle
Probably the one point which justifies the importance of advertising and branding for businesses which are suffering. If your product is failing, or if it is not catching up in the market, then Advertising is the one thing which can rejuvenate your business.
At such times, you may remember the BCG matrix and think, why am I feeding a dying dog? This is because one of the strategies of the BCG matrix is that you can convert a dog to a question mark, and then the question mark to a star if you use unique and creative ways to rejuvenate the product or the brand. And such creative ways can be observed in advertising only.
A business exists to gain profits. Naturally, when the ROI is up, the price can be kept more due to perceived value, and when the product life cycle is lengthy, then the profitability of the firm will also be positive by a long way.
In fact, in all the above examples, a firm which has a high quality of product, but does not advertise well, is a firm which can have a lesser ROI. This is because the firm in investing a lot to maintain the high quality of the product. But it cannot demand an even higher pricing as it is not spending in advertising or brand building activities.
The importance of advertising can be emphasized with the above examples where all the important metrics of your organization will remain positive if the right budget is kept for advertising. Firms with low priced product, should also invest in the right advertising mediums so that they at least float in the market.