The impact of an advertising campaign may not be felt simply in the period of that expenditure but should be expected to have a residual impact which gradually attenuates over subsequent periods. Potential buyers may be only partly convinced by a particular campaign, but the current campaign may build a necessary base for future persuasion. Alternatively, the campaign may convince consumers to switch to this product, but only after they deplete their personal inventories of rivals’ products. Thus a dollar spent on advertising now may lead to revenues in the same period, plus a stream of revenues in future periods. In this respect advertising can be regarded as an investment project and should compete for funds within the firm on the same basis as other investment projects with multiperiod revenue streams.
The conditions for optimal advertising expenditure considered in the earlier sections of this chapter were generated under the implicit assumption that the total impact of the expenditure would be felt in the same period. This analysis remains sufficiently accurate if the residual impact of advertising expenditure is very low or if the time period used for analysis is long enough to include the greater part of the total impact. If there is a significant residual impact of advertising expenditures in subsequent periods, the present value of the future revenues generated must be included in the decision-making process. Current advertising expenditures may exceed the short- run-profit-maximizing level to the extent of the present value of the future revenues generated, before we could say that the firm’s longer-term objective of maximizing net worth was not being served.
Example: The massive advertising expenditures of the major breweries on advertising can be seen as an investment in future sales. Once won over to a particular brew, beer drinkers tend to remain loyal to that brand for a while, until they are attracted to the loyal ranks of another beer by the clever advertisements of a rival. The Miller Brewing Company’s campaign focusing on the “It’s Miller Time” theme convinced millions of Americans to switch to Miller beer. Later, Anheuser-Busch’s “This Bud’s for You” campaign took Budweiser beer to market preeminence. Table 13-2 indicates the market shares of the brewing companies and their advertising expenditures. Note the much greater advertising expenditures of Anheuser-Busch and Miller, their growing market shares, and the disappearance of smaller firms who were unable to keep up with the pace set by the market leaders. Many of the smaller firms merged in an attempt to gain the size necessary to compete with the largest two on a national basis. 7 In retrospect we can see that the huge advertising expenditures of Anheuser-Busch and Miller have led to an increasing share of the market as time progresses. 8