ADVERTISING AND CONSUMPTION:

ADVERTISING AND CONSUMPTION:

AN ANALYSIS OF CONSUMERS RESPONSE TO ADVERTISING

UNIT-1Understanding Consumer Behavior

Consumer Needs

Every profit making organization attempts to recognize consumers needs and to develop a product which can satisfy the consumers at a profit. Hence, the accurate understanding of consumer psychology is indispensable from the point of view of policy making, product planning and marketing. Broadly, firms recognize two kinds of consumer needs:

Existing needs: consumers and competitors are aware of existing needs. Usually, goods and services aimed towards such needs are already in the market. In this case, a firm wishing to enter the market must compete with the existing firms.Potential needs: some firms, on the basis of market research are able to identify the potential needs of consumers. Researchers look for areas in which the consumer can be persuaded to succumb to needs of which he/she might be previously unaware. In this case, there is no existing competition. Once the firm in question launches such a product, that either targets a totally different market segment or has identified a potential need, other firms enter, thus creating competition. An example of potential need is the case of Hindustan Unilevers Livon Hair Softener. The product aimed at the previously unrecognized market of such softening products. Once the product was launched, several other competitors entered the market.

Consumer behavior

Understanding consumer behavior requires, in the words of Hawkins, Best and Coney, the study of individuals, groups or organizations and the processes they use to select, secure, use and dispose of products, services, experiences or ideas to satisfy needs and the impacts that these processes have on the consumer and society.

It is absolutely essential for producers to know how consumers respond or are likely to respond to their actions. The concept of advertising is drawn entirely from consumers response to the producers attempts to attract the attention of, and provide information to the people. Factors that affect consumer behavior can be briefly summarized as:

State of the economy: when an economy is in recession, consumers tend to save more, vice versa for boom periods.Physical environment: consumers behavior is also affected by physical factors such as change of seasons, etc.Government regulations: taxation policies, legal system, etc. affect consumers behavior.Technological developments: developments in technology such as internet facilities also alter consumer behavior.

All marketing decisions and regulations are based on assumptions about consumer behavior. Hence, consumer theory forms an important aspect of all marketing (and advertising) decisions.

A brief look at consumer theory:

The available opportunities for spending with the given income of a consumer define the opportunity set for the consumer. The consumer operates within this set, restricted by a line called the budget constraint. The consumer may operate on or below the budget constraint. The various opportunity sets that provide the same level of utility to the consumer define indifference curves. The optimum level of consumption is the point of tangency of the budget constraint and an indifference curve. As higher indifference curves imply higher utility, the optimum level is on the highest possible curve which also lies on the budget constraint and hence, is feasible.

Indifference curve, IC1

A

B

C

0

Budget Constraint

Commodity X

Commodity Y

The above figure represents consumer equilibrium as A on a given budget constraint BC as the tangency of the highest feasible IC1 with BC. The consumer consumes corresponding amounts of the two commodities, X and Y.

Factors such as income, nature and price of the commodity and tastes of consumers influence the decision to buy a particular product.

Influencing consumer choice

Marketers have the power of influencing consumers decision. Attractive marketing can significantly augment the sales of a commodity. An important tool used by marketers is Advertising. The process of advertising can be broadly classified as two types:

Informative: informative advertising attempts to inform consumers about the concerned product, its price and features.Persuasive: persuasive advertising attempts to attract consumers towards a particular commodity, often aiming to deflect consumers away from substitutes available in the market.

The following sections attempt to analyze the effectiveness of advertising as a marketing tool for various categories of commodities, among different consumer segments.

UNIT 2: Advertising in India

Introduction

Advertising is a form of communication that typically attempts to persuade potential customers to purchase or to consume more of a particular brand of product or service. The two main types of advertising are informative and persuasive, which have already been elaborated in the previous unit. Advertising is carried out through various channels, utilizing mass media as well as personal communication channels. The commonly used channels for advertising are:

Print advertising: this refers to advertising via the print media. Newspapers, magazines and journals carry advertisements in the classifieds format as well as eye-catching posters.Television/Radio: the audio visual medium of the television is the most popular means of advertising in the country. Its reach is much wider than that of print media, and appeals more to the viewers. With the increasing number of FM channels, advertising via radio has also gained momentum in recent years.Handouts/pamphlets/posters/billboards: printed advertisements may be distributed as handouts or pamphlets to the people. Often posters/billboards are also put up in public spaces.Online advertising: online advertising involves advertising through e-mails, or by booking space for advertising on frequently visited sites, offering assistance through search engines, etc. Personal approach: some producers believe in approaching customers through employed agents and demonstrating the qualities of the product.

Advertising in India

Advertisers in India can reach 75 percent of the population through television and almost the entire population through radio. Television advertising is available at reasonable cost in India. According to a study by Hindustan Thompson Associates, an advertising research firm in India, a 10-second advertisement costs about $3,100 during prime time; however, such advertising is often ineffective since the majority of people who watch television cannot afford the products. Media channels that provide companies to convey with consumers are gradually adapting in accordance to the changes brought forth by liberalization of the economy. The drastic rise in National Income over the past two decades has made the consumers richer than ever before. This has lead to competition in the market place for consumer products. The result is that consumer companies are increasingly concerned about effective marketing. As they attempt to tell apart their products and communicate with potential customers. Consumer goods producers marvel at the huge size of the Indian market. Companies also say that groundbreaking marketing can be the solution to tackling the fragmentation and relative poverty of much of the Indian market. An extremely successful effort was the packaging of shampoos in affordable sachets. This opened up a whole new consumer base among the low income earners, who could not afford to purchase entire bottles.

It is believed that increase in the advertising is positively associated with increase in the consumption of firms goods. It can have negative impact on the competitors goods. If increased advertising levels for the economy are associated with increased in consumption, this suggests that consumer are increasing current consumption at the expense of future consumption. Therefore advertising affects aggregate consumption and business cycle.

Advertising attempts to stimulate and simulate. Stimulation involves themes designed to encourage current owners to talk about the product/brand or prospective owners to ask current owners for their impressions. Simulating involves an apparent opinion leader in order to advise the usage of a brand. Celebrities/Public figures are used for such advertisements.

UNIT 3: Consumers and Advertising

Advertising is usually aimed at a group of potential consumers. Producers target specific consumer groups and create the advertisement which would appear attractive to that particular group.

Market segmentation

A market segment is a portion of a larger market whose needs differ somewhat from the larger market. Since a market segment has unique needs, a firm that develops a total product focused solely on the needs of that segment will be able to meet the segments needs better than a firm whose product/service attempts to meet the needs of multiple segments. Various market segments can be defined on the basis of consumers need or on the basis of customers characteristics.

This report focuses solely on consumer goods, the effect of advertisement of goods under this sector on consumers. Consumer goods broadly includes the following: Apparel, Photography, Stationery, Storage, Tobacco, Toys, Watches, Electrical and Electronics, Food and Beverages, Footwear, Gifts and Greetings, Home and Garden, Jewellery, Luggage, and Personal Care products.

Expectations of consumers vs. expectations of producers

The decision to purchase by consumers is based on the regular factors such as income, tastes and prices. However, another important determinant in the process of decision making is the value they feel they would derive from purchasing that particular product or service. Consumers expect a return on investment. In other words, consumers expect value for each penny they spend. At the same time the marketers expect a return on the investment they make, i.e. advertising expenditure. Advertising expenditure is often huge, in fact, it forms the bulk of marketing expenditure. The return may be in the form of increased profitability and an increase in the firm value. Every year companies invest millions of rupees or dollars in marketing communication. Naturally, marketers expect a return on investment (RoI) on this. Their expectation stems from the likely impact, marketing investments have on the market performance and thus the profitability of the firm.

The response of consumers to advertisements is analyzed through a sample survey conducted personally among the age group of 19-28 years. Special emphasis is placed on the audio visual medium of television, as it occupies the majority of advertising budget in the consumer goods segment.

UNIT 4: The survey: Evaluating consumers response

Details of the survey

The sample survey was conducted through an online questionnaire, prepared with the view to judge the role of advertisements in influencing the decision making process of consumers. Number of persons (sample size) was 100, selected randomly from various parts of the country. The selected sample had a mean age of 24 years. Hence, the focus is on persons who have just entered the job market or are pursuing graduate level study. The survey was conducted for the following consumer goods: consumer electronics, designer apparel, beverages and skincare products.

Consumer Durables: Consumer electronics and home appliances

The Indian consumer electronics market consists basically of audio, video, and games console products designed primarily for domestic use, while home appliances covers products such as Television, Washing machine, Air conditioner, Refrigerator, etc.

Although approximately 40% of India's population lives in serious poverty, the growing middle class forms a large potential customer base for consumer electronics. However, levels of disposable income for consumers in this class may still be low relative to those expected in fully developed economies. This means greater price sensitivity in the Indian market. The compound annual growth rate of the market in the period 2006-2011 is predicted to be 5.4%.

The survey revealed that advertisements of consumer electronics serve the purpose of providing information about new products launched, special offers and brand building. Consumers showed a positive response to persuasive advertising. They also exhibited a preference for trusted brands rather than extensively advertised new players. 54% of the respondents could recall an advertisement of the product at the time of purchase. This simply reflects the prevalence of a thrifty middle class.

Consumer durables: Response to advertising

Category of respondents

% of people

Persons who can recall advertisement

84

Persons owning the brand whose ad they recall

54

Unable to recall any specific advertisement

16

Total

100

Apparel

Indias apparel sector is highly fragmented, comprising about 30,000 units and employing some 3 million people. India has the potential to become a rapidly growing market for better-quality apparel, particularly brand-name fashion goods. The countrys sizable middle class of an estimated 200 million, which is expected to double in the next 10 years, includes an estimated 40 million people who prefer brand-name fashions. Indias westernized college students are another large market for foreign casual attire. Trade sources in India claim that the Indian apparel market is underdeveloped, largely because GOI trade and investment policies have shielded local producers from foreign competition. India has the potential to benefit significantly from ongoing global trade liberalization in apparel, particularly now that the GOI has deregulated the apparel sector. A recent study of the Indian textile and apparel industry concluded that India has the potential to double its current world market share in apparel during the next 5 years, provided that the apparel sector invests about $16.6 billion in new production technology.

52.17% of the respondents admitted that they occasionally shopped for designer apparel. The rest 34.78% said that they always wore designer labels; therefore, a certain craze for designer labels among the young has been detected. This group of consumers also recalls print advertisements and other special promotional activities by international designer brands. These brands also specifically target the high income earning young consumers. The promotional strategies and brand building appear too be successful not only in wooing the high income consumers, but even persons with relatively low income do shop for designer labels occasionally. Not a single respondent has claimed to have never shopped for branded clothes.

Apparel: response to promotion

How often do you shop for branded clothes/accessories?

Percentage of respondents

Always

35%

Sometimes

52%

Rarely

13%

Never

0%

On being questioned about why they favor established labels, the response was:

Reason for preference

percentage of respondents

Brand Name

36

Quality

64

Total

100

However, 74% of the respondents also admitted that they wouldnt purchase a product of equivalent quality and price without the brand name.

FMCG: Food and Beverages

The size of the Food and Beverages Industry is estimated to be Rs 3584 billion. India is among the world's major producer of food and produces over 600 million tons of food products every year and has huge potentials with the food and agricultural sector which contributes to around 22% of Indias GDP. Indias food consumption market is expanding rapidly to attract global food and drink giants. Rising per capita incomes, changing life styles, and a growing younger population with preference for convenience food have driven growth. The main divisions within this industry are: Food grains, Confectionery, Cooked food items, Aloholic beverages, Non alcoholic beverages, Chocolates, Ice creams, Biscuits.

Low margins, high volumes, price sensitivity and high advertising expenses characterize the packaged malt, nutritional drinks, aerated drinks, chocolate and biscuit industries. The market is seeing players like Heinz, Mars, Marico, Conagra, Pepsi, ITC, Dabur, Britannia, Cadbury, HLL, Pillsbury, Nestle and Amul, Smithkline Beecham, The Surya Food and Agro Private Ltd etc and a host of local manufacturers offering competition with their established brands on national level. Every player is busy in the race by expanding their product range. Biscuits' packaging has undergone a swift transformation. Major players are now trying to differentiate their brands to reflect their superior quality through superior packaging. Some market leaders have introduced age-specific market segmentation with a new sub-brand, Real Junior targeted at Children below 6 years, claimed to be a first of its kind initiative in the country. Cashing on brand value and encouraged by the growing market, select dairy companies are planning major expansion plans in various cities with new brands of products including those suited to local taste and preferences and realizing higher price with higher sales volume Some national brands like Haldiram, Bikanervala, K C Das, Chitales, Ganguram, Brijwasi, Agarwal Sweets etc are getting wide acceptance because of consistent quality and product safety.

The survey reveals that 41% of the people purchase packaged food and beverages under the influence of advertisements. The notable factor is that a lesser number (37%) of people felt that they made purchases simply on the basis of the taste of the edible item. A significant number of respondents couldnt state why they preferred a particular commodity. Their ambiguous response indicates the influential role that persuasive advertising may have in this particular market. Advertisements are an important factor also due to the close competition between the major players.

Response to advertisements in Food and Beverages market

taste

37%

taste, packaging

11%

taste,

advertisements

41%

no particular

preference

11%

taste

37%

taste, packaging

11%

taste,

advertisements

41%

no particular

preference

11%

Personal Care Products (non medicinal)

In the personal care products market, skincare forms an important segment. I decided to limit my observations to this segment, which has witnessed a major expansion in terms of advertising expenditure in recent times. The survey revealed that the consumers were prone to developing a sense of brand loyalty for skincare items. 50% of the respondents had been using a particular brand of soap/shampoo/shower gel/skin cream for a period of more than six months. Only 23% admitted to have been switching brands frequently. A significant 88% revealed that they had indeed been influenced by advertisements. In this particular market, advertisements are the very basic medium of informing consumers and they essentially form an image with which the consumer constantly associates the brand. The effectiveness of advertisements is extremely apparent.

Brand loyalties: time period of usage of a particular brand

less than 2 months

23%

2-6 months

27%

more than 6

months

50%

less than 2 months

23%

2-6 months

27%

more than 6

months

50%

The skincare products market can be subdivided on the basis of various income groups of the consumers. Some products, especially anti-ageing creams essentially target the upwardly mobile high income consumers of metros. On the other hand, low priced fairness products target the comparatively lower income groups. The respondents largely comprised of urban young people with frequent and comfortable access to the internet showed an extremely low preference for fairness products. 82% stated that they do not use any such product.

UNIT 5: Observations

The survey has revealed several interesting features about the consumer goods market and the influence of advertisements. The observations can be broadly outlined as:

Consumer Durables: The electrical appliances market is not driven by persuasive advertisements. Consumers depend on trusted brands rather than newly launched products. Low priced products of established brands have the maximum takers. New entrants may grab a foothold by undercutting the existing players.

Personal care products (non medicinal): the consumers displayed no significant sense of brand loyalty. Advertisements can prove to be extremely influential. Brand loyalty exists only for extremely old names such as HLLs Lux soaps. The upwardly mobile consumers displayed a greater willingness to try new products. Hence, the effect of persuasive advertising is notable in this market.

FMCG: The aerated drinks market is characterized by the availability of near perfect substitutes to each product. The chocolate market is also largely driven by persuasive advertising. The market leader Cadbury has maximized the benefits of effective marketing through appealing ads. The number of respondents (41) who admitted being influenced by advertisements to a great extent outnumbered those whose only priority was taste (37).

Apparel: Persuasive advertising doesnt play a major role in this market. Consumers emphasized solely on quality and the brand name. Designer labels have succeeded in developing immense goodwill. Consumers with high levels of income admitted to being brand freaks, while a significant proportion (52%) shops for labels occasionally. Although brand building is important, persuasive advertisement doesnt significantly stimulate consumers.Consumers value the brand name of a product highly. As brand image is often cultivated through advertisements, products with flashy ads do draw attention easily, and hence can build a positive, reliable image. Therefore, from the point of view of brand building, apart from quality of the product, advertising too plays a pivotal role across all markets.Although the recall value of advertisements of products like Vodafone, Sansui, Westside, Maggi noodles, Dish TV is quite high, but it doesnt assure consumption or sales. Hence, the creative medium often acts as a means of amusement for the consumers, but may be ineffective in serving its very purpose. The lack of a perfect correlation between recall value and consumption signifies wastage of resources.

Celebrities as endorsers: the response from persuasive advertising was noticed to rise significantly when celebrities endorsed the brand. The mass appeal of celebrities helps in drawing customers. Brands such as Pepsi have actually succeeded in cashing on the fan base of celebrities. Consumers have shown a preference for celebrity endorsed brands. These advertisements also have higher visibility and recall value.

Celebrities as endorsers: Favorites

0%5%10%15%20%25%30%

Shah Rukh Khan

Hrithik Roshan

Amitabh Bachchan

Yuvraj Singh

Sachin Tendulkar

Amir khan

Aishwarya Rai

Influence of celebrities as endorsers

0%

5%

10%

15%

20%

25%

30%

Shah Rukh Khan

Hrithik Roshan

Amitabh Bachchan

Yuvraj Singh

Sachin Tendulkar

Amir khan

Aishwarya Rai

Influence of celebrities as endorsers

Effectiveness of television ads: A notable feature is that a majority of people who watch television cannot afford the high priced commodities advertised through it. The high cost of advertising via the television media ($3100 for 10 seconds ad space according to Hindustan Thomson Associates) is therefore unjustified as it often goes unmatched by response.Although it is widely believed that advertising accelerates sales, the study clearly points out glaring flaws in this assumption. Advertising, at best can be used as a means of communication, i.e., to inform the consumers about the product rather than as a means of persuasion. The FMCG sector depends largely on advertising as consumers response is immediate and immense. For other products, especially consumer durables, it is advisable not to expand expenditure on advertising unless something new is to be offered.

Wasteful expenditure: Expenditure on advertising is wasted when-

Ads are misleading.

Shoddy content: Ads are designed in a manner which confuses rather than help consumers in making decisions regarding purchase.

Incorrect frequency: when advertising is too infrequent for consumers to retain or too frequent, acting as irritants rather than stimulants.

Target audience: Advertising through television, taken up in the survey suffers from the flaw that the target audience in many cases is missed. Ads of expensive products targeting the high income consumers may not be seen by busy professionals at all. Ads aimed at students might go unnoticed if they are telecast during school/college hours.

UNIT 6: Advertising and Profitability: The Conclusion

An analysis of the correlation between advertising expenditure, sales and profitability can clearly establish the extent to which advertising is useful or wasteful.

The following graph illustrates advertisement spending, net profit and sales in different sectors in the year 2007.

(Source: CMIE-Prowess)

In light of the survey conducted and the results obtained by previous studies (the above graph), it can be concluded that the effect of persuasive advertising expenditure is significant in the FMCG sector. The other sectors depend more on brand value and the value offered to consumers, while extensive persuasive advertising is often unnecessary and ineffective.

The above conclusion is however, not universal or absolute. The following exceptions are obvious:

Celebrities as endorsers: Use of public personalities as reliable opinion leaders has obtained better response from consumers.

Prisoners Dilemma: Firms are often victims of the prisoners dilemma, and are forced to advertise in order to avoid losing out on market share. Competitors indulging in advertising simultaneously nullify the effectiveness that advertising wouldve had if only one of them had advertised. When one firm, A increases its expenditure on advertising, its sales increase and so does its market shares as it captures consumers who had previously favored the competitor, Bs product. In order to regain its market share, B also increases its expenditure on advertising. As a result, while net expenditure on advertising has increased, its effect on sales/revenue is minimal. The firms would have been better off if they had collectively decided not to advertise. The amount spent on advertising could have been better utilized if channeled to the fields of research, development of new products, etc.

Demand curve for B

Demand curve for A

Quantity

Price

DA*

DB*

0

In the figure, the blue line represents the demand curve for firm A when neither firm advertises. The light green line shows the demand for firm B when neither firm advertises. The purple (DA*) and olive (DB*) lines show the demand curves when the firms indulge in an advertising war. The net effect on market share is negligible, while expenses rise significantly.

Bibliography

Managerial Economics; D.N. Dwivedi

Consumer Behavior: Building Marketing Strategy; by Hawkins, Best and Coney.

Consumer Durable Goods Survey; FICCI 2006.

Food and Beverages Survey; FICCI 2006.

Advertising and Firm Value: Mapping The Relationship Between Advertising, Profitability and Business Strategy in India; by Ms. Aninditha Kundu, Prof. Prashant Kulkarni, Prof. Ananth Mrthy N.K.

Advertising Expenditure is Wasted Expenditure; by Supriya Atal, Rohini Vijaygopal.