Advertising Elasticity Of Demand (AED)

Advertising Elasticity of Demand (or simply Advertising Elasticity, sometimes reduced to AED) is a measure of the efficacy of increasing advertising investment in the sense of increasing product demand. Traditionally, demand for the product that is the focus of the advertising campaign may be inversely linked to the amount spent if the advertising is negative since it is perceived to be positive. Advertising Elasticity of Demand (or simply Advertising Elasticity, sometimes reduced to AED) is a measure of the efficacy of increasing advertising investment in the sense of increasing product demand. Traditionally, demand for the product that is the focus of the advertising campaign may be inversely linked to the amount spent if the advertising is negative since it is perceived to be positive.

AED is used to calculate this strategy’s efficacy in increasing demand versus cost. Mathematically, then, AED calculates the percentage change in the amount of a good requested caused by a percentage that also shifts in advertisement expenditure in that sector:

AED is still optimistic, which means that demand always rises as advertisement spending increases. The price of goods and the availability of lower-priced alternatives may also influence market demand. In other words, the proportion by means of which sales will extend after a 1% increase in marketing expenditure, assuming all other elements stay equal (ceteris paribus). AED is typically positive; Negative advertising may, however, end result in a negative AED.

The demand for a certain good/service depends on the following to name a few factors, apart from the cost of advertisement:

  • The income of the people of the region (state of the economy): If the region has recently been hit by an economic recession, where people have been laid off on a wide scale and are struggling to make ends meet, or in a region with generally low wages, expensive ads may not produce very good results.
  • Price of the product: If a similar product is on the market at a lower price, regardless of how much money is invested into the ads, it can take away from the popularity of the advertising.
  • Quality/Appeal of the ad: High expense of audio-visual or content doesn’t necessarily mean high quality. Or the ad may just lack attraction for the audience for which the product is intended.

Advertising elasticity of demand (AED) can be used to make sure advertising charges are in line. Consequently, an enlarge in demand may no longer be the only desired result of advertising. The rule of thumb combines the AED with a recognized charge elasticity of demand (PED) for the equal good. In order to assess the efficacy of their promotional campaigns, companies often review their advertising-to-sales ratio. A change in demand for a product or service will result in quality ads. Therefore, AED might not be the most precise indicator of the efficacy of the rise in spending on ads.

Example for AED: a business for a fairly cheaper good, such as a hamburger, may additionally end result in a quick bump in sales. On the different hand, advertising for a luxurious object such as a highly-priced vehicle or piece of jewelry might also no longer see a payback for some time because the good is expensive and is less likely to be purchased on a whim.

In addition, a comparison of PED and AED may also be used to evaluate whether the correct approach for maximizing income (e.g. for Heinz in the baked beans market) or changing prices (as with supermarket-owned brands) is more advertisement. It can be difficult for businesses that offer products or services with a high PED to boost revenue simply by rising their advertisement spending. In such situations, if the business does not first fix the high price point that keeps customers away, attempting to achieve a positive AED will be unsuccessful.

 

Information Sources:

  1. investopedia.com
  2. mbaskool.com
  3. wikipedia