Marketing costs and prices: an expanded view

doi:10.1017/CBO9780511488726.007

6 - Marketing costs and prices: an expanded view

Published online by Cambridge University Press: 22 September 2009

David J. Reibstein ,

Yogesh Joshi and

Paul W. Farris

Edited by

Paul W. Farris and

Michael J. Moore

Show author details

David J. Reibstein: Affiliation:
Professor of Marketing at the Wharton School University of Pennsylvania
Yogesh Joshi: Affiliation:
PhD candidate at the Wharton School University of Pennsylvania
Paul W. Farris: Affiliation:
Professor of Business University of Virginia's Darden Graduate School
Paul W. Farris: Affiliation:
University of Virginia
Michael J. Moore: Affiliation:
University of Virginia

Book contents

Get access

Summary

More than twenty years ago Farris and Reibstein (1979) published research that demonstrated a strong cross-sectional correlation between relative advertising expenditures and relative prices charged by manufacturers of non-durable consumer goods. Data for that research were taken from the PIMS database. The correlation was demonstrated to survive a number of controls for relative quality and market share. The correlation was also shown to be stronger for later stages in the product life-cycle and for products purchased in relatively small dollar amounts. The research made no claims about the direction of causality from advertising to prices or vice versa. Instead, the paper argued that from the management perspective “consistency” between advertising and pricing was important. In other words, businesses with high (or low) relative prices should generally also have high (or low) levels of relative advertising. The claim for the importance of consistency was buttressed by evidence in the paper that businesses with inconsistent pricing and advertising strategies earned lower ROIs.

In this chapter we first review and then extend the earlier Farris and Reibstein (1979) study with new analyses based on the PIMS data. The review is placed in the context of a broader managerial (not necessarily a public policy) concern with the relationship between total marketing costs (not just advertising) and prices. The expanded view of marketing costs includes salesforce and other marketing expenses – budget items with collective dollar values that are typically three to four times advertising budgets.

Type: Chapter
Information: The Profit Impact of Marketing Strategy Project
Retrospect and Prospects
, pp. 124 - 152

DOI: https://doi.org/10.1017/CBO9780511488726.007 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Book purchase

Temporarily unavailable

References

Abela, Andrew, and Paul W. Farris. 2001. “Advertising and Competition.” In P. Bloom and G. Gundlach, eds. Handbook of Marketing and Society, 184–205. Thousand Oaks, CA: Sage Publications

Abela, Andrew, and Farris, Paul W.. 2002. “100 Leading National Advertisers.” Ad Age (June 24): 1Google Scholar

Ailawadi, Kusum L., Lehmann, Donald R., and Neslin, Scott A.. 2003. “Revenue Premium as an Outcome Measure of Brand Equity,” Journal of Marketing 77 (October): 1–17CrossRef Google Scholar

Albion, Mark S., and Paul W. Farris. 1987. “Manufacturer Advertising and Retailer Gross Margins.” In P. Bloom, ed. Advances in Marketing and Public Policy, 107–135. Greenwich, CT: JAI Press

Bemmaor, A. C., and Mouchoux, D.. 1991. “Measuring the Short-term Effect of In-store Promotion and Retail Advertising on Brand Sales: A Factorial Experiment.” Journal of Marketing Research 28 (May): 202–214CrossRef Google Scholar

Benham, Lee. 1972. “The Effect of Advertising on the Price of Eyeglasses,” Journal of Law and Economics 15 (October): 337–352CrossRef Google Scholar

Bolton, Ruth N. 1989. “The Relationship Between Market Characteristics and Promotional Price Elasticities.” Marketing Science 8 (2): 153–169CrossRef Google Scholar

Cady, John. 1976. “Advertising Restrictions and Retail Prices,” Journal of Advertising Research 16 (October): 27–30Google Scholar

Comanor, William S., and Thomas A. Wilson. 1974. Advertising and Market Power. Cambridge, MA: Harvard University Press

Dorfman, Robert, and Steiner, Peter O.. 1954. “Optimal Advertising and Optimal Quality.” American Economic Review 44: 826–836Google Scholar

Eskin, Gerald J. 1975. “A Case for Test Marketing Experiments,” Journal of Advertising Research 15 (April): 27–33Google Scholar

Eskin, Gerald J., and Baron, Penny H.. 1977. “Effect of Price and Advertising in Test-Market Experiments,” Journal of Marketing Research 14 (November): 499–508CrossRef Google Scholar

Farris, Paul W., and Albion, Mark S.. 1980. “The Impact of Advertising on the Price of Consumer Products,” Journal of Marketing 44 (Summer): 17–35CrossRef Google Scholar

Farris, Paul W., and Albion, Mark S.. 1981. “Determinants of the Advertising-to-Sales Ratio.” Journal of Advertising Research 21 (February): 19–27Google Scholar

Farris, Paul W., and Buzzell, Robert D.. 1976. “Variations in Advertising Intensity: Some Cross-Sectional Analyses.” Journal of Marketing 43 (Fall): 112–122CrossRef Google Scholar

Farris, Paul W., and Reibstein, David J.. 1979. “How Prices, Ad Expenditures, and Profits are Linked.” Harvard Business Review 57 (November–December): 173–184Google Scholar

Kahle, Dave. 2003. “Is it Time to Revise Your Sales Compensation Plan?” http://www.saleslobby.com/Mag/0701/SCDK.asp

Kaul, A., and Wittink, D.. 1995. “Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price.” Marketing Science 14(3): 151–161CrossRef Google Scholar

Labor Bureau. 2003. http://www.bls.gov/oes/2001/oes_41Sa.htm

Lambin, Jean J. 1976. Advertising, Competition and Market Conduct in Oligopoly Over Time, Amsterdam: North-Holland

Maurizi, Alex R. 1972. “The Effect of Laws Against Price Advertising: The Case of Retail Gasoline,” Western Economic Journal 10 (September): 321–329Google Scholar

Mitra, A., and Lynch, J., 1995. “Toward a Reconciliation of Market Power and Information Theories of Advertising Effects on Price Elasticity.” Journal of Consumer Research 21 (4): 644–660CrossRef Google Scholar

Moriarty, M. 1983. “Feature Advertising – Price Interaction Effects in the Retail Environment.” Journal of Retailing 59 (Summer): 80–98Google Scholar

Nerlove, Marc, and Arrow, Kenneth. 1962. “Optimal Advertising Policy Under Dynamic Conditions.” Econometrica (May): 129–142Google Scholar

Prasad, V. Kanti, and Ring, L. Winston. 1976. “Measuring Sales Effects of Some Marketing Mix Variables and Their Interactions.” Journal of Marketing Research 13 (November): 391–396CrossRef Google Scholar

Reekie, W. Duncan. 1979. Advertising and Price. London: The Advertising Association

Sethuraman, Raj, and Tellis, Gerard. 2002. “Does Manufacturer Advertising Suppress or Stimulate Retail Price Promotions? Analytical Model and Empirical Analysis.” Journal of Retailing 78: 253–263CrossRef Google Scholar

Steiner, Robert L. 1973. “Does Advertising Lower Consumer Prices?” Journal of Marketing 37 (October): 19–26CrossRef Google Scholar

Steiner, R. 1993. “The Inverse Association between margins of Manufacturers and Retailers.” Review of Industrial Organization 8: 717–740CrossRef Google Scholar

Vanhonacker, Wilfried R. 1989. “Modeling the Effect of Advertising on Price Response: An Econometric Framework and Some Preliminary Findings.” Journal of Business Research 19: 127–149CrossRef Google Scholar

Wittink, D. R. 1977. “Exploring Territorial Differences in the Relationship Between Marketing Variables.” Journal of Marketing Reseach 14 (May): 145–155CrossRef Google Scholar