Advertising is an action performed by
businesses. It involves the business buying exposure time in a
medium where they are free to say pretty much what they want. The time is typically used to promote their products in some way.
There are two main poles of advertising:
It is, of course, possible to combine the two, and most adverts are a combination of these two poles.
Businesses spend a lot of money on advertising, but relatively few people are employed in the advertising industry. Most of this money goes into buying the exposure time in the media - the most popular mediums are newspapers, television and radio. Advertising is often done through an agency - there are many advantages of this, such as the ability to fire your agency at any time and use it as a scapegoat if things go wrong.
Why advertise? There are numerous reasons. The most common two are related to branding - more specifically, brand loyalty and brand awareness.
Brand awareness, or product awareness, is a neccesary precondition to the sale of many products. A brand like McDonalds and the Golden Arches has 95% brand awareness in the United Kingdom. And when people know about your product - what it is, where they can get it and how much it costs - they are more likely to buy it. Many companies that are involved in selling their services to other businesses actually advertise to consumers to increase awareness of their name, so that other companies will be more likely to employ them. A case in point is the IT security firm Integralis, which advertises itself to consumers as "The best kept secret" in IT.
Brand loyalty is a serious competitive advantage. When people are loyal to a brand, they are willing to pay a little more for it and carry on buying it for a prolonged period. In technical terms, the product is said to have a lower price elasticity of demand - this means that the relationship between the increase in price and decrease in demand for the product are not proportional.
Advertising builds brand loyalty by helping create a certain image for the brand. For instance, the image of Clarks the shoeshop is sensible and pragmatic, and this image is strengthened through advertising. Mothers who want sensible shoes for their children are encouraged to shop there for this reason.
Moving away from branding, another more direct effect of successful advertising is to simply increase demand for a product. On a graph of supply and demand, the demand curve moves to the right - more people want the product at a higher price, and the supplier wants to supply more because of this. A useful way to calculate the effectiveness of an advertising campaign intended to increase demand is with the formula -
% change in quantity demanded
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% change in advertising expense
By increasing sales in this manner, a company also helps approach its
most efficient level of production - the point at which its average costs are as low as they can get. Increased sales lead to benefits such as
economies of scale.