Advertising, Part 1: Packaging Audiences and Marketing Investing

A business school professor enters the classroom on the first day and asks the class: “What is NBC in the business of doing?” Fresh young MBA students respond readily. They are anxious to show their enthusiasm to the professor in the belief that grades will determine their career fate and that the professor is holds the power over A’s and C’s. NBC is in the entertainment business, the broadcasting business, the sitcom business, and a host of other ideas come from the mouths of babes. After an appropriate delay, the professor responds with irrefutable conviction: “No, NBC is in the business of packaging audiences for Advertisers.” The professor’s response is fundamentally true.

The media can be broadly defined to include, but not limited to: general and industry specific news web sites; newsletters and newspapers; popular and trade magazines; broadcast radio and TV; billboards; conference organizers. Each of the media outlets are in the business of packaging audiences for sale to advertisers. For businesses, our problem is to select which set of media outlets most efficiently communicates our marketing message to our target audience.

Some businesses reject using the media. They reply that advertising isn’t effective or that it doesn’t make sense to pay for TV spots on Superbowl Sunday. While I won’t advocate advertising during the Superbowl, I also don’t support throwing the baby out with the bath water. Including some advertising in the marketing mix is often appropriate.

The problem with suggesting that small businesses advertise is that advertising is an investment activity difficult to sustain for cash flow limited firms. While it is possible that a consumer will see an advertisement and then contact the firm to make a purchase, it is highly unlikely. Advertising is an activity conducted to increase brand awareness and familiarity. It requires a long term investment strategy, where pay-back at the time of the advertisement run rarely comes or comes only for very specific markets. The payback on advertising generally comes when the advertising is supplemented by a second purchasing stimulus activity, such as a direct sales call.

New ventures often desire to forgo marketing investment decisions initially. While they are willing to make an investment in team selection, training, product development, and infrastructure creation, new ventures often want immediate gratification when they go to the marketing and sales department. This is much to their detriment.

Brand awareness and familiarity grease the path for future sales calls, stimulate interest, and deflect vendor qualification questions. For instance, when a salesperson calls a manager that had seen an advertisement for the firm in Crane’s Chicago Business, TMR, or Lightwave, that manager is less likely to ask “Who are you again?” and more likely to reply “Yes, I have heard of you guys, now what do you do?” This second question opens the door for conversation and firm-customer relationship building.

While avoiding advertising and marketing investment may improve short term cash flow, it will also come with dampened long-term profits. Without increasing the brand awareness efficiently, the direct sales force and the rest of the marketing mix will have to carry this burden on their own. This will often mean that some sales & marketing dollars intended to transact business are instead spent on telling your market that you exist.

Economically, the argument is as follows. Suppose that your direct sales force expects to make $90 to $120 K/yr, or equivalently, each hour of work from them is worth $45 to $60. If they can make 20 cold calls per hour with an average long distance charge of $0.50, each phone call is costing the firm $2.75 to $3.50. If a media source can advertise the company name to 30,000 people for $5000, and the audience relevance is at 20%, then reaching them through advertising costs $0.83 per interaction. Clearly, for this example, raising awareness through advertising is more cost efficient than raising awareness through cold calling. (Readers should select their own numbers in creating their economic argument for or against advertising. The above numbers were only intended to provide a model for valuing advertising.)

Although advertising won’t remove the need for cold calling, it will make cold calls warm. Perhaps the best way to think about advertising is that it adds a customer-firm touch point, thus increasing the strength of the customer-firm relationship. As to the media, their function is to package audiences for sale to businesses. Businesses should use this marketing vehicle as cost efficiency arguments indicate.

The May Report, TECH BUSINESS BRIEFS, April 24, 2002