What has a stronger effect on sales: advertising or pricing? Gerard J. Tellis conducted a meta-analysis of 42 different studies in 1988, published in the Journal of Marketing Research, and found that the effect of price is eight-times as large as the effect of advertising.
Tellis, who is a professor at the University of Southern California in Los Angeles today, studied 367 price elasticities from about 220 different brands/markets coming from 42 different studies published between 1960 and 1985. Elasticities in this context describe how far the demand (i.e. sales!) changes when the price or the advertising volume is altered. For his study, Tellis noticed an average price elasticity of -1.76, implying that an increase in price by 1 percent would lead to a reduction in sales by 1.76 percent.
In contrast, a meta-study from Gert Assmus (Dartmouth College), John Farley and Donald Lehmann (both Columbia University), which was published in the Journal of Marketing Research in 1984, found a short-term advertising elasticity of 0.221 meaning that an increase in advertising by 1 percent leads to an increase in sales of 0.22 percent. They looked at 128 statistical models mentioned in 22 studies from the years 1969-1981. Overall, this means that the effect of price changes is eight times as large as the effect of advertising.
Retailers and Brands underestimate the power of active price management
We had a look at what companies spend on advertising and price management: Spending on TV advertising alone are estimated to reach 224 billion US dollars worldwide in 2015. Companies engage large departments of advertising professionals here, hire external agencies, etc. Comparing this number to the spending on pricing strategy, there is a huge discrepancy. To give an example: The world’s leading consultancy for pricing strategies, Simon-Kucher & Partners, forecasts revenues for 2016 which are in the order of about 270 million US dollars. So despite the much higher lever of pricing, firms seem to massively underestimate the potential of more professionally manage pricing.
An active price management contributes towards your longer term competitiveness. blackbee, our innovative suite of solutions for retailers and brands across all industry sectors, gives you a precise view on prices on the market. Contact us now!