The Costs Of Advertising
( Originally Published 1939 )
Advertising is often pointed to as a conspicuous example of unnecessary cost and waste in distribution. Although advertising costs for certain highly competitive products amount to a substantial share of what the consumer pays for them, the total cost of advertising in the United States is no more than a small percentage of the entire cost of distributing commodities. According to a recent estimated the total revenue of various advertising media in 1937 was about $1.8 billion, distributed as follows:
Newspapers $570 million
Car cards, store and window displays, theatre pro- 100
Added to the $1.8 billion is an estimated $200 million or more for agency commissions and for art and mechanical charges and advertising department expense. In the aggregate, therefore, the costs of advertising in 1937 amounted to about $2 billion. Included in this total is about $500 million for national advertising as re-ported in the 1935 Census. Fees paid to professional advertising agencies by national advertisers amounted to $75 million."
A very large proportion of this $2 billion total is chargeable to commodity distribution, but not all of it is, since the total includes advertising expenditures of institutions and service agencies such as amusement and transportation enterprises. When it is remembered that terminal buyers paid a total of almost $66 billion for goods in 1929 it is clear that commodity advertising probably aver-ages less than 3 per cent of the price of finished goods and less than 5 per cent of the $38.5 billion estimated total cost of distribution.
Advertising takes so many forms and varies so widely among different types of distributors and kinds of products that it is hazardous to make any generalization about it. One type of retail store specializing in style merchandise, for example, may have advertising running to 10 per cent of sales, while another store selling staple merchandise may find it unprofitable to advertise at all. Even among trade-marked products distributed to the national market there is a wide difference in the extent to which they are advertised, and among those which are extensively advertised the cost of advertising is often surprisingly small.
Cigarettes as an Example
Cigarettes furnish an extreme example of competitive advertising, yet the average cost for cigarettes selling at fourteen cents is little more than half a cent a package. But small as this sum is the advertising expenditures of cigarette manufacturers for their enormous volume in 1937 came to a total of nearly $45 million.
Whatever one may think of the social desirability of competitive advertising it has undoubtedly been effective in selling more cigarettes. The industry's sales rose from 119 billion cigarettes in 1929 to 163 billion in 1937, while combined advertising expenditures for newspaper, magazine, radio and other media increased nearly $10 million in the same period. In spite of its effectiveness in increasing sales, however, it is clear that cigarette advertising is almost purely competitive and has little educational value. Like an armament race among nations, when one producer increases his appropriation for advertising, his competitors have to defend their own positions by doing likewise. Competition in the cigarette industry has become solely a battle of wits and of money to influence the consumer, not to improve the quality or lower the cost of the product.
Cigarettes appear to be no exception among highly advertised mass distributed products in their relatively small cost per unit of sale. According to an address by Bernard Lichtenberg, the aver-age cost of advertising Campbell soup is only 36/1000ths of a cent per can. Advertising Coca-Cola costs less than 16/1000ths of a cent for each five-cent glass. Loose-Wiles Biscuit Company reported an expenditure of less than one-tenth of a cent for a ten-cent package. The cost of advertising a nationally-known breakfast food was three-tenths of a cent for a fifteen-cent package. For a Lord Pepperell shirt selling for $1.95 the manufacturers' advertising expense amounted to about six-tenths of a cent; for a nationally advertised sheet costing the consumer $1.75 only one cent was spent for advertising.
Advertised products, however, are often sold at retail at considerably higher prices than their unadvertised equivalents. This may not be due to actual costs of advertising such products, nor even to the larger profits of successful national distributors, but to the fact that it frequently costs much more to maintain the elaborate and far-flung organization needed to provide continuous national distribution of a trade-marked article than it does to distribute a standard product through traditional channels to a readily accessible market. There is also some evidence that profits on nationally advertised products are larger than on similar goods which are not advertised. On the other hand it is clear that national advertising, by widening the market for goods and creating mass demand, has helped to make the spectacular economies of mass production possible.
Drugs and Cosmetics
Cosmetics and pharmaceuticals are examples of products often sold at much higher prices than their unadvertised equivalents-whether because of heavy advertising expense, large profits made possible by advertising, or the elaborate organizations required to distribute on a national scale. Many examples were reported by the Federal Trade Commission in 1931. The average wholesale price per ounce of twelve proprietary or branded medicines was $2.64, while the average for chemically-identical non-proprietary sub-stances was 94 cents per ounce. The difference of $1.70 per ounce was the price the retailer (and ultimately the consumer) paid for the advertised product.
The higher cost of the branded article to the retailer is partly justified, of course, for it is easier to sell packaged demand items to the consumer than to fill a prescription or push a substitute. The retailer's mark-up is usually less on advertised than on non-proprietary products. The difference between what the consumer pays for the proprietary and for the non-proprietary product, therefore, is not as great as the discrepancy in wholesale prices would indicate.
That drugs and toilet articles are conspicuous for the proportion of advertising expense which they bear is obvious from a glance at Figure 19, which shows advertising and sales promotion expenses of manufacturers of various products expressed as a per cent of their net sales in 1931. More than eighteen cents out of each dollar that the manufacturer of drug and toilet products receives is for their advertising and sales promotion activities. In contrast, some-what more than eight cents is spent by tobacco manufacturers, the next in rank, and one and a half cents by producers of agricultural implements, the lowest in rank. The price which the consumer pays, of course, is larger than that which the manufacturer receives, so that advertising cost does not represent as large a share of the consumer's dollar.