A few months ago, I was having a few drinks with an ex-Marketing director of Coca Cola in the Carribean. He had shared a few interesting stories and facts. Here is one:
- Atleast 80% of the cost of every bottle/can of Coke is the cost of marketing it.
- If Coke don’t allocate at least 50% of the coke to advertising for ONE day, it takes them about a week to get back the market share. The effect becomes exponentially more damaging if the break is longer.
That to me is disgusting.
In the beginning, ‘advertising’ was used to inform people of new products, explain to them the features & uses of a new item. Progressively, the forces of the free markets have forced companies into a spiral leading to what I consider absurdity today.
So here are some inherent characteristics of a free market economy: (fact)
- Maximum Profit is the Goal. (Maximize revenue, reduce costs).
- Over-time, as supply outstrips demand, there is an over-production of goods.
- Over-production of goods inevitably leads to an over-production of credit to try & get people to buy.
This leads to the following: (opinion)
- Consumerism: i.e buying of things we clearly don’t need.
- Higher prices on the things that we do buy.
- Lower quality of products that we buy.
- An unsustainable, society wide economic system.
But anyhow, for now I will create a simple hypothetical case to illustrate my point.
[h4] Jackie Jones & Her Jeans [/h4]
So, I will create a fictional character to make this interesting. Jackie lives in Toronto, she isn’t particularly rich but she makes a decent living as a free-lance graphic designer.
Now Jackie has two pair of Jeans and she is perfectly happy with them. Frankly, she is the kind of person who literally just wears one pair of jeans and only occasionally when her favorite pair is in the wash she wears the others. Objectively & subjectively she really doesn’t need another pair.
For arguments sake, lets say Jackie is the only person buying jeans in Toronto (she is the only demand), and there is only one company (“Cool Jeans LLC”) producing jeans (the only supply).
Lets say that the Jeans themselves cost $15 to make.
At 2 pairs, Jackie is at her natural equilibrium and the price of the Jeans is $50/each.
So Jackie bought her Jeans and now she won’t need a new pair till one of the rips beyond usability. But that will be a while. Cool Jeans LLC however already manufactured 7 pairs. They aren’t exactly going to sit around and wait for Jackie to actually NEED a new pair are they?? So they decide to target her.
They invest $10 in an Adsense campaign following her all over the internet, they set up a billboard ($20) outside her house with Jackie’s favorite actress looking stunning in a new ‘collection’ that they ‘JUST’ launched. Just to make sure Jackie buys another pair they make this pair have golden buttons on the zipper (an additional $10).
Hmmmmm. A few days passes and eventually Jackie realizes that she can’t live without those Jeans. She walks in to the store and buys em. To her surprise, they cost $80.
“How come?? I paid $50 for the last two”.
“Its a new collection m’am. Also they have golden buttons”…
“Ok, here is my card”.
Now, lets asses this case study.
1. When Jackie made the decision to buy the new pair, her demand ‘shifted’. It expanded.
There is of course the possibility that this ‘advertising’ could have been used in a different scenario to push her along the Demand curve to a lower price. For e.g: Jackie gets an email saying “You Bought 2 pairs of Jeans from us this year so we’d like to give you a discount of 40% on the 3rd”. But as you’ll see in a minute this is less lucrative from an economics point of view.
2. The Advertising shifted her perceived value & utility of the Jeans through advertising. She was mentally convinced that this pair of jeans was significantly different from the last to view it as being on a different demand curve altogether.
3. The calculations:
Jackie Paid = $80
Cost of Jeans = $15
Adsense + Billboard = $30
Golden Zipper = $10
Net Profit/Sale = $25
Now lets look at the other possible outcome (the Jeans Manufacturer would simply not differentiate the product & sell it cheaper).
In that case, Jackie would have bought a 3rd pair at around $30.
If you deduct the $15 cost of the Jeans, the maker would have made $15/sale, which is $10 less than had he ran the whole advertising campaign.
4. The consequences for Jackie:
- She paid a whole $80 for the exclusivity & differentiation of the Jeans.
- Almost 50% of the cost of product was spent on trying to sell her the product.
- Upon purchasing the jeans, Jackie essentially financed her own inflation of her own perception. She bought a ‘story’ that came with the Jeans.
- She has Jeans she doesn’t wear now.
- She could have spent the $80 on a lot of more valuable purchases.
Here is the bottom-line. Advertising means worse and more expensive products.