Wednesday, October 20, 2010

Cut Prices? Advertise More? Companies face a dilemma

I will be out tomorrow at an off site event with my fellow portfolio managers, so I thought I would do a quick post this evening.

I went to hear Alexia Quadrani from JP Morgan today. Alexia follows the advertising and media companies for JPM, and has a pretty good take on the space.

Alexia reported today that the ad market is incredibly strong - probably stronger than it has been in years. It is even picking up in areas which you might not expect, like outdoor advertising.

Why is this happening when the economy is so weak?

This blog post from the New York Times today is a good discussion of what a number of businesses are going through these days. Most are struggling to get "top line" (i.e., sales) growth. So the question becomes: do you advertise more, or just cut prices, to try to boost sales?

Here was the author's take (who happens to own 5 businesses in the Chicago area):

Once we’d done the math, it became obvious that it made the most sense to go after those...customers who had never heard of us. We decided that spending 1 percent more for advertising – including traditional media, social media (it’s not free; you have to pay someone to do it), and Google AdWords — was a better use of our money than cutting prices. That’s because the 50 percent group that has never heard of us is a much bigger target than the other groups and because advertising would also give us a shot at the people who know about us but are going elsewhere and the people who have not been happy with us...

..Every company is different, and every company’s position in the marketplace is different. The bottom line is that playing around with pricing is not always the most effective way to increase the bottom line, even though it may seem the easiest. You’ve got to do the math. Making yourself busier doesn’t necessarily make you more money.

Should I Charge Less or Advertise More? -