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Wherever we go outside or even stay inside home watching TV alone, our life is always open to the advertisement. Due to the several advertisements that are appearing in front of your eyes couple of times while watching TV, people might feel so bored to watch that again and again. However, even if they want to get away from the advertisement, it is inevitable. It is because in the 21st century market, even mega corporations such as Samsung and Apple cannot survive in the competition without letting consumers know their new products. However, who knows how the advertisement moves consumers’ willingness to buy their products? Are there any specific measurements or method to exactly portrays the practicality and the intensity of marketing strategy? In this project, our group mainly focused on indicating the method that could accurately measure the efficiency and intensity of marketing strategy by using formulas such as Lerner Index and Vidale and Wolfe Advertising Model. Then, we used two big sports companies, Nike and Adidas, as the model and compared its efficiency in their advertising power.
Marketing is defined as “the management process through which goods and services move from concept to the customer” . In other words, marketing is a fundamental activity for an economy to function. Marketing is aimed to answer necessities and wants via exchange. Unlike its stereotype, marketing does not solely consist of selling. Rather, ultimate marketing is one that does not need promotion or selling.
Various variables consist a marketing environment. Laws, natural disasters, substitute good producers, etc. are among the many forces that may influence profits. The marketing mix refers to impacts that firms are able to manage in order to effectively market their products. The marketing mix is sorted into four groups named as “The Four P’s of Marketing”: Product, Price, Place, and Promotion. Product refers to the good and the price refers to the amount the good is charged for. Place is how the good will reach consumers while promotion is how awareness of the product is raised. An arguable fifth P, positioning, also exists. Positioning deals with how a product is perceived by the consumer. For example, Pizza Hut effectively manages its four P’s. Its product is pizza with moderate pricing. The place for Pizza Hut is Pizza Hut stores in over 70 countries and delivery. Promotion is diverse for this multi-national company with TV, radio, Internet, etc. all being utilized to show that Pizza Hut pizzas are safe and delicious.
Advertising is a form of promotion in marketing. It is defined as “the act of calling public attention to one’s product”. Advertising proves crucial in the survival of businesses for they have to compete for consumers. Advertising occurs in various forms. A glimpse into everyday life gives you a glimpse into the many ways companies try to reach out to you and how desperate they are to take control of their market.
Although all companies know that advertising is vital, the biggest question for companies is how to advertise efficiently. John Wanamaker famously stated, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half”.
Over the years various methods have been applied to allocate the wasted half. The Dorfman-Steiner Theorem in 1954 successfully in measuring advertising intensity. This neoclassical economics theorem stated a simple equation.
A stands for advertising expenses whereas S means sales. e_A and e respectively denote demand elasticity with respect to advertising costs and price. Simply put, the greater the elasticity, degree of sensitivity, of the advertising elasticity of demand and the marginal cost of production is, the higher the level of advertising. This equation is also referred to as the “Dorfman-Steiner Condition”. Using the Lerner Index, we can make further conclusions about the Dorfman-Steiner Condition.
The Lerner Index, as shown above, measures the market power of a company. LI stands for the value of the Lerner Index. P symbolizes the market price of a firm’s products while c is the marginal cost the firm is charged for each product. The Lerner Index has a range between 0 and 1. Higher values result in higher degrees of market power. An enterprise with a Lerner Index value of 1 would be considered a monopoly whereas an institution with a Lerner Index value close to 0 would be an extremely frail business.
Applying the Lerner Index to the Dorfman-Steiner Condition, we can also state:
Three conclusions can be made. First, advertising intensity and market power are confirmed to have a positive correlation. Second, firms with the ability to react quickly to sales due to advertising will have more intense advertising. Finally, if both the advertising elasticity of demand and the price elasticity of demand is similar, then advertising similarity can also be expected.
The Dorfman-Steiner model showed a rough model of how advertising works. However, it was under the assumption that advertising has a constant positive effect on sales much like the linear equation suggests. This assumption is clearly not true. As most will know from personal experience, ads become ineffective after a certain period of time. These two graphs show how advertisements behave.
The graph on the left is a graph that regards the impact of advertising over time. This is called the advertising lag. The right graph is the advertising saturation graph which shows that sales level off as advertising intensity measured in gross rating points (GRP).
In 1957, Vidale and Wolfe further expand this relationship between sales and advertising. The relationship is shown in the below equation:
(s(t)) ?=?µ(1-(s(t))/M)-ks(t) (s(0)=s_0)
s(t) represents the function of sales. µ embodies the advertising budget and ? is a coefficient that measures the effect of advertising on new markets. M is the threshold of sales intensity. k is the decay constant. This equation is the direct relationship between advertising and demand.
All in all, advertising can be summed up as an action to maximize sale profits. Dorfman, Steiner, Vidale, and Wolfe bring a closer view into exactly how advertising works with profits. With this foundation, determining the winner of the World Cup advertisement battle between Nike and Adidas will be much easier.
Adidas is a German MNC (multi-national corporation) that specializes in shoes, clothing, and accessories. It is currently the second largest sportswear manufacturer worldwide, trailing Nike. Nevertheless, this company founded by Adolf Dassier has grown from a small business in 1948 into a giant group that currently owns Reebok and TaylorMade. The iconic three parallel bars have implanted themselves as the one of the best-recognized brands in the world.
The Adidas marketing strategy is successful in attracting a wide range of customers and maximizing profit. Adidas outsources its production and manages marketing domestically. Adidas cooperates with famous designers to stay ahead of the fashion curve. Additionally, Adidas has many official relationships such as being an official sponsor of FIFA. By associating their brand with major sporting events such as the World Cup and endorsements by well-known athletes, Adidas positions itself as a high quality-sporting product.
The market force of Adidas can be measured using the Lerner Index.
There are certain variables that are impossible to measure using the Lerner Index. Adidas offers various goods and services at different prices with each type of product produced at a different marginal cost. Therefore, we found the average price of all Adidas products by using range, finding a middle price using the highest and lowest prices. The marginal cost of production is also yet to be found. Using revenue and profit we can find the marginal cost.
The revenue of Adidas Group is €3.533 billion. The value of the price that we found was nearly € 187. The amount of units that Adidas have sold during the first quarter of 2014 can be estimated to be about 18,893,000 units. The amount of profit during Adidas’s first quarter amounted to be €1,736 million. Therefore, we can find the total cost to be nearly €3,514,000,000. Dividing this value with the estimated quantity, we can predict that the marginal cost is about €186. Finally we can conclude that the Lerner Index for Adidas Group is about 0.005. Although this seems very low, this is perfectly normal for Adidas participates in a competitive market, making it impossible for extremely high market power.
With an estimate of Adidas’s market power in the world economy, we can next analyze the advertising intensity of Adidas Group.
The advertising intensity of a specific firm is measure through the Dorfman-Steiner Theorem. Adidas has reported €444 million for their sales and marketing operations budget. The overall sales, revenue, is equal to the previously stated amount of €3.533 billion. Using this ratio, we can give advertising intensity a value in numbers. That value is expressed as the number 7.9. It must be kept in mind that the Dorfman-Steiner Theorem states the optimal amount of advertising for a company. By plugging the price and sale values, we assumed that Adidas Group is invested the optimal amount of resources into their advertising sector.
The Vidale-Wolfe model also takes into consideration the amount of advertising done, expressed by the variable µ. The µ variable is equal to the 1/T_A or the inverse of the time an ad is observed. Under the postulate that all advertisement viewers will watch an advertisement from start to finish and that Adidas releases an advertisement of average length (about 30 seconds). As a result, we can define the variable µ as 1/30 or about 0.033.
(s(t)) ?=0.033?(1-(s(t))/M)-ks(t) (s(0)=s_0)
We can approximate the derivative of the sales function. Using the latest two sales records from Adidas over time, we can approximate the derivative of the sales function. The first quarter of 2014 wielded €3,533 million in net sales for Adidas. The last quarter of 2013 had € 3,479 million in net sales for Adidas. Using the time of one quarter (3 months), we can use the difference to find the slope between these two points and consequently find the approximate derivative of the sale function.
(3,533,000,000-3,479,000,000)/7889231.5=54,000,000/7889231.5˜6.8=(s(t) ) ?
The next postulate that we can produce is related to the sales threshold. The ideal threshold that can be produced by an advertisement campaign is infinity. Therefore, we can put a limit upon the equation and send the limit to infinity, which consequently sends the fraction to 0. (Imagine the n is M)
The constant k is equal to 1/T_f or the inverse of the time it takes to forget an advertisement. Using the GLP as a survey pool, the survey wielded that the average time it takes to forget an advertisement is about 3 minutes. This value is equal to 1/180 or 0.0056. Finally, we get an equation that shows the relationship between the advertising expenditures and the maximum amount of sales that can be achieved through this expenditure. Since the advertising expenditures amounts is €444 million, we can find the optimal amount of sales.
The maximum amount of sales that can be made by Adidas Group’s first quarter advertising campaign is 2,616 million euros. Comparing this to the actual value of sales Adidas had made and calculating it into a percentage, we can see how efficient Adidas really is in their advertising campaign.
Although the efficiency of the advertisement campaign is 74%
Nike is an American multinational corporation that makes profit mainly by selling shoes, apparels, sport equipment and accessories. The current head office of Nike Company is in Beaverton, Oregon, United States. Nike was founded in 1964 as Blue Ribbon Sports. Then, in 1971, it changed its name to the current one, Nike, Inc. Nike has signed big stars such as Michael Jordan, LeBron James, Christiano Ronaldo and Kobe Bryant as its sponsor.
The market force of Nike can also be measured using the Lerner Index.
As we have done with Adidas, we find the price of Nike products using the range of the product prices. The average price also amounts to €187.
Using the three equations above, we can once again find the amount of units that Nike Company had sold. The revenue of Nike was €5.16 billion. Using this we find that Nike sold approximately 27.6 million units in the first quarter of 2014. The profit for Nike’s first quarter came to be €575 million. Therefore, we find that the total cost is €4.58 billion. Divided by the number of units, the marginal cost is €166. Finally, we can find the Lerner Index for Nike. The Lerner Index comes to be 0.1. Nike comes to have a much larger market force than Adidas.
The Vidale-Wolfe model can also be applied to Nike too. Through the Adidas equation, we found all the constants that are need in the Vidale-Wolfe model.
Using the change in sales between the last quarter of 2013 and the first quarter of 2014, we can once again approximate the derivative of the sales function. The last quarter of 2013 had €4.9 billion in revenue where as the first quarter of 2014 had €5.2 billion in sales. Over the time of 3 months, we find the derivative of sales for Nike.
(5,200,000,000-4,900,000,000)/(7889231.5)=(300,000,000)/(7889231.5)˜38=(s(t) ) ?
Nike showed a explosive increase in sales with the derivative of their sales function to come to be approximated to 38. Using this we can fit the last piece of the Vidale-Wolfe puzzle in.
The maximum amount of sales that can be received through this advertising campaign is about €12 billion. Therefore, we can once again calculate the efficiency.
The efficiency is 43% of the first quarter 2014 Nike advertising campaign.
Although Nike has a more commanding force in the market, Adidas spends its resources more efficiently.
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