Advertising comprises oral and visual messages that are aimed at informing customers about the availability of a product and influencing them to purchase the product.
The main objective of advertising is to promote the sales of an organization by increasing the demand for products. An organization spends a large amount in various sales promotion activities.
Advertisement elasticity of sales refers to responsiveness of sales with proportionate or percentage change in advertisement expenditure.
It helps in determining the optimum level of expenditure on advertisement of an organization. Advertisement elasticity of sales plays a crucial role in determining advertisement expenditure when there are restrictions by government on the cost of advertisement or there is high competition in the market.
There is a direct relationship between the advertisement expenditure and sales of an organization. It implies that the sales of an organization increases with increase in advertisement expenditure. However, the increase in sales is not always the same; it differs at all levels of the total sales.
The advertisement elasticity (eA) can be calculated by using the following formula:
eA = Change in sales/Change in advertisement cost
Change in sales = Increase in sales (∆S)/Initial Sales (S)
Change in advertisement cost = Increase in advertisement cost (∆A)/Initial advertisement cost (A)
The symbolic representation of the formula is as follows:
eA = ∆S/S : ∆A/A
eA = ∆S/S * A/∆A
eA = ∆S/∆A * A/S
∆S can be calculated by subtracting initial sales (S) from increase in initial sales (S1), which is as follows:
∆S = S1 – S
Similarly, ∆A is the difference between the new advertisement cost (A1) and initial advertisement cost (A).
It can be calculated by the following formula:
∆A = A1 – A
Let us understand the concept of advertisement elasticity of sales with the help of an example.
Suppose the sales promotion expenditure of an organization increases from Rs. 20,000 to Rs. 60,000. Consequently, the sales of the organization increases from 40,000 units to 60,000 units.
Now, the advertisement elasticity would be calculated as follows:
∆S = 60000-40000 = 20000 units
∆A = Rs. 60,000- Rs. 20,000 = Rs. 40,000
eA = 20000/40000*20000/40000 =0.25 (less than one)
Interpretation of Advertisement Elasticity of Sales:
The numerical value of advertisement elasticity of sales ranges from zero to infinity. It is different for different situations of an organization.
Table-8: shows the interpretation of advertisement elasticity of sales:
Factors Influencing Advertisement Elasticity of Sales:
The advertisement elasticity of sales is affected by a number of factors.
Some of the important factors are explained as follows:
i. Development of Product in the Market:
Refers to one of the major determinant of advertisement elasticity of sales. When a product is newly introduced in the market, then the advertisement elasticity of sales is greater than unity. This implies that advertisement elasticity of sales decreases with increase in the sales of a product.
On the other hand, if the product is well- established in the market, then the purpose of advertisement would be to attract new customers and create additional demand. In such a case, proportional increase in demand is less than the proportional increase in advertisement expenditure.
ii. Advertisement by Competitors:
Influences the advertisement elasticity of sales to a greater extent. In a highly competitive market, the effectiveness of advertisement of an organization can be determined by the effectiveness of advertisement of its competitors. The more the effective advertisement of competitors, lower the sales of the organization.
iii. Quality of Advertisement:
Refers to the fact that advertisement elasticity of sales would be higher if the quality of advertisement of a product is superior to the past. In addition, the elasticity would also be higher if the advertisement of an organization is superior to the advertisement of its competitors in present.
Apart from aforementioned factors, advertisement elasticity of sales is also influenced by some other factors, such as change in the price of a product, consumer’s income, and number of substitutes.