Advertising has become so commonplace that it is sometimes as well to remember exactly what it does, or at least the purpose of it.
The initial function of advertising a new (or indeed any) product is to inform potential customers, to create awareness. This articulates what is new or different about the product. The next function is to sustain this message, which serves to build the image of the product and grow brand equity, or core demand for the product. The difficult part is analysing how effective the advertising is in fulfilling these functions.
By measuring the sales response to the initial advertising on a new brand, IRI can gauge whether further bursts are likely to produce the desired effect. In a recent example, the manufacturer of a newly launched brand had detected that their major competitor had improved sales during the first advertising campaign. With this information, combined with some poor feedback from the advertising research, the conclusion was that the advertising was helping the sector generically and not specifically the new brand. As a result, the next burst of advertising was almost cancelled.
However, a detailed analysis of the new IRI sales rate index showed that, in fact, the new brand had benefited individually from the TV and that the competition had, coincidentally, increased sales through trade promotions and in-store merchandising at the same time. On the strength of this evidence the advertising was aired and a satisfactory sales response was measured.
Launching new products
To accompany the advertising, there are a number of other factors that contribute to the success or otherwise of a new product. Nowadays, the vast majority of new products launch at a price higher than the category average but this price premium tends to reduce thereafter, particularly if the product meets with a high degree of success.
In the UK, getting and maintaining high distribution and a rate of sale close to the category average is crucial to the success of the new launch. The rate of sale recorded in the first 12 weeks on shelf is a good indicator of how the product will perform in the long term.
Two and a half years ago, 25% of all products on shelf weren’t available in the supermarket. It is therefore clear that there is a very high level of ‘market churn’, which means that your products’ sales rate must remain competitive in order to maintain presence in-store.
The long-term effects of advertising
Historically, it has been determined that there are three areas which contribute to a product’s sales. Base, or every day sales make up 60-70%; promotions account for 20-25%; and advertising just 5-10%.
As part of the process to measure advertising, two effects are taken in account. The first is the decay effect, which suggests that advertising works even when it is not visible, be it television, radio or outdoor posters for example. The second is the concept of diminishing returns, which states that doubling the amount of advertising does not (necessarily) lead to twice the amount of sales.
It has always been concluded that the short term effect of advertising is small, especially when compared to that of promotions. IRI’s new approach provides a new angle on analysing the effects of advertising by using store level data. This is the level at which all the ‘action’ takes place and results in extremely accurate information.
This new approach indicates that base sales and price elasticity change over time with the pressure of long-term advertising. Core demand, or brand equity, grows with increased advertising, showing a positive effect overall. Furthermore, the long-term effect of advertising led to a brand being less price-sensitive. This could be good news for manufacturers keen to apply gradual price increases after initially dropping the price after launch.
In the long term, the results for promotions were less clear cut but tended towards a more negative overall effect. This would suggest that while promotions work well in the short term, they should be accompanied by advertising and then phased out or used only sporadically in the longer term.
For more information please contact Tim Eales +44 (0)1344 746038