What is the advertising elasticity of demand?
Advertising elasticity of demand (AED) is a measure of a market’s sensitivity to increases or decreases in advertising saturation. Advertising elasticity is a measure of the effectiveness of an advertising campaign in generating new sales. It is calculated by dividing the percentage change in quantity demanded by the percentage change in advertising expenses. A positive advertising elasticity indicates that an increase in advertising leads to an increase in demand for the advertised good or service.
Understand advertising elasticity of demand (AED)
The impact that an increase in advertising expenses has on sales varies by industry. Quality advertising will result in a change in demand for a product or service. Advertising elasticity of demand is valuable because it quantifies the change in demand (expressed as a percentage) when spending on advertising in a given industry. Simply put, how successful is a 1% increase in ad spend in increasing sales in a specific sector when all other factors are equal.
For example, a commercial for a fairly inexpensive good, such as a hamburger, can generate a rapid increase in sales. On the other hand, advertising a piece of jewelry may not see a payback for some time because the good is expensive and less likely to be bought on a whim.
Because a number of external factors, such as the state of the economy and consumer tastes, can also result in a change in the quantity of a good demanded, advertising elasticity of demand is not the most accurate predictor of demand. effect of advertising on sales. For example, in an industry where all competitors advertise at the same level, additional advertising may not have a direct effect on sales. A good example of this is when a specific beer company advertises its product, forcing a consumer to buy beer, but not simply the specific brand they saw advertised. Beer has an elasticity of 0.0 across the industry, which means that advertising has little influence on earnings.With that said, AEDs can vary widely by brand.
Advertising elasticity of applied demand
The primary use for advertising elasticity of demand is to ensure that your advertising expenses are justified by your earnings. A comparison of prices of demand and elasticity of demand (ped) can be used to calculate whether more advertising would maximize profits. ped applied in conjunction with aed can help determine what impact on-demand price changes may have. To obtain maximum profit, the advertising-sales ratio of a company must be equal to minus the ratio of advertising and price elasticities of demand, or a / pq = – (ea / ep). If a company finds that its AED is high, or if its order is low, they must advertise a lot.
