Paid advertisement: “We don’t advertise”
I RECENTLY came across an online ad that said, “The reason our price is low is because we spend nothing on advertising.”
What an interesting claim to make--in a paid advertisement.
It reminds me of the time my mom, in the early stages of dementia, phoned me to ask for my phone number.
The notion that advertising raises prices, or that its lack diminishes them, is a myth.
Not once in the history of advertising has a CEO said, “We need to advertise, so let’s raise prices.” Neither has a CEO ever said, “We need to lower prices, so let’s quit advertising.”
When prospective clients request an advertising proposal, sometimes they choke on the budget. At that point, some re-allocate funds and some send me packing, but the one thing none of them does is draw a heavy sigh and say, “Guess we’ll have to raise prices.”
In the sense that all company revenues come from sales, sure, ultimately the consumer pays for advertising. But that wasn’t the question. The question was whether advertising raises prices.
Suppose, for the sake of argument, a company ceased advertising and passed the savings to customers. Know how much those savings would amount to? Maybe a penny or three per item. If that. McDonald’s has a huge advertising budget. But the per-item costs gets pretty danged small when you spread it over billions of sandwiches, billions of fries, billions of drinks, and on and on.
When advertising increases sales, which is, you know, kinda its job, it becomes a profit center, not an expense. Increased sales increase production, resulting in economies of scale and substantial savings for the company. The company may or may not pass on the savings to customers.
Pricing is determined by what people are willing to pay. What people are willing to pay is determined by their perception of value. You may have noticed, for instance, that a Mont Blanc pen costs somewhat more than a Bic pen. Trust me on this: the difference has nothing to do with their respective advertising budgets. If no one wants to pay enough for a product to cover the producer’s expenses plus yield a bit of profit, the product will disappear.
—Steve Cuno
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