Friday, July 20, 2007

Perhaps advertising isn't the money pit people thought it was

The July-August Harvard Business Review contains a provocative article from Prof. Leonard Lodish of the Wharton School of Business and Carl Mela of Duke University on the decline of product brands ("If Brands Are Built Over Years, Why Are They Managed Over Quarters?").

We've looked at the phenomenon before from the private-label goods perspective, Lodish and Mela approach the problem from a different angle: rather than blaming Wal-Mart and other retailers for squeezing the value out of branded products by their price-cutting philosophy and private-label strategies, they fault the brand managers themselves, who favor price promotion strategies—-which bring a rapid response from customers—-over brand-building activities, such as advertising, which only work over the long term.

By examining data on baseline sales (i.e., sales levels without promotions), and performance during promotions periods, they document persuasively how certain brands fall into a spiral of commoditization by relying on discounted sales for an increasing percentage of their sales volume. Customers learn to stock up when the product is on special, and their perceived value of the product declines accordingly. Brand equity is eroded.

[Why do brand managers prefer promotions? Lodish's and Mela's reason, perhaps good fodder for another post, is that purchase data is useful immediately, while brand equity information is less tangible and takes years to identify trends.]

By contrast, companies who hold firm on price and invest in long-term brand-building activities, such as advertising, development of new distribution channels, and product innovation (exhibit A: P&G), show higher baseline sales levels and therefore more unit profit per sale.

Think it can't be done? Clorox bleach (a product ripe for commoditization if I've ever seen one) was able to raise retail prices 30% and turn a trend of revenue decline into growth by cutting promotions budgets and increasing advertising.

So, television networks, radio stations, newspapers: take heart. Perhaps marketers will fall in love with advertising all over again.