Appendix BB The Pricing of Advertisements

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1 Appendix BB The Pricing of Advertisements 1643 Advertising Price It is measured by CPM (cost per thousand). Low CPM might include a lot of waste circulation, and thus is not necessarily better than higher CPM. Perspectives on Radio and Television. University of Florida 4 th Ed 1644 In Radio, the base rate is the charge for 1 minute of broadcast. Radio Rate Cards list base rates and variables, or discounts. Rt Rate can vary by time of fday and length of broadcast. National broadcasts are obviously more expensive than local broadcasts. Perspectives on Radio and Television. University of Florida 4 th Ed 1645 TV & Radio Ad Jargon Avail is a space for a commercial. Inventory is the sum of avails. Sell-out rate is the point at which the inventory is depleted, around 85%. Perspectives on Radio and Television. University of Florida 4 th Ed

2 TV Avails 30-sec avail is standard. 60-sec is about double the price. 10-sec (ID) is about 50% the price. Rates float according to supply and demand. Channels will often sell spots off the card or at lower prices than those published. Perspectives on Radio and Television. University of Florida 4 th Ed 1647 Perspectives on Radio and Television. University of Florida 4 th Ed 1648 Production Cost: TV Advertising Average 30 sec spot: $300 K to produce Expensive ads to produce: $3-5 mil Extrapolated to length of regular feature film: production cost (w/o distribution and promotion) would be $1 bil dollar US average film $70 mil production cost, including star salaries : TV advertising initially consisted of sponsorships of whole programs ( The GE Hour ) 1960s: The 60-second spots 1980s: 30-second spot. 1990s: Some 5-second spots

3 Also Opposite Trend: Infomercial (unlimited-length ad) after 1992 TV Advertising Types Network advertising (~35%) National & regional spot advertising (30%) centrally managed ad materials delivered dto selected station Local, retail advertising (30%) Barter syndication (5%) What Determines The Price Of An Advertising Spot? 1653 What Determines The Price Of Advertising? On demand side: Magnitude of impact of the medium On supply side: Size of inventory affects supply

4 Supply of Ads Advertising prices are set by supply and demand Supply has been increasing with new and more media Effectiveness of ads has declined d due to over-exposure. Declining CPM (adjusted for inflation But also, bigger advertising buys 1655 in order to get attention Primetime spot prices (30 sec US) Top Average 1960 $30, $65, $400,000 (Cosby) $125, $500,000 (Seinfeld) 2003 $455,000 (Friends) $115,799 ( And Bradley Johnson, Advertising Age, Low CPM Can Spell Bargain for Buyers May Ad Prices in Print Media Most newspapers and magazines announce their CPM as a page rate or per thousand circulation as the single column inch rate divided by their circulation Standard & Poor s, Industry Surveys, Publishing, October

5 Other terms are gross impressions (GI), based on the total number of people reached (used mostly in radio), and cost per point (CPP), reached by dividing the total cost of a commercial by the commercials on a program with an audience rating of 3.0, then 18 GRPs are accumulated. Dennis Derrick, Media Management in the Age of Giants, Iowa State Press 1659 A common summary measure that combines the program rating and the average number of times the home is reached during this period (frequency of exposure) is Gross Rating Points (GRPs) GRP = Reach X Frequency George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications 1660 Similar to GRP Target Ratings Points (TRPs) Unlike GRP, TRP does not include waste coverage. George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications 1661 GRP A purchase of 100 GRPs could mean 100% of the market is exposed once or 50% of the market is exposed twice or 25% of the market is exposed four times, and so on. George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications

6 Need to know how many members of the intended audience the schedule actually reaches GRPs are likely to lead roughly a 70% probability of high awareness, GRP would yield about a 33% probability, and less than 1000 would probably result in almost no awareness. George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications 1663 The evidence suggests strongly than an exposure frequency of two within a purchase cycle is an effective level Others use 3 exposures as a rule of thumb Advertisers have settled on three as the minimum George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications 1664 Since they do not know how many times the viewer will actually be exposed, advertisers typically purchase GRPs that lead to more than three exposures to increase the likelihood of effective reach and frequency. George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications 1665 Determining Relative Costs of Media 1. Cost per thousand (CPM) 2. Cost per ratings point (CPRP) 3. Daily inch rate: For newspapers, pp cost effectiveness is based on the daily inch rate. Like magazines, newspapers now use the cost per thousand formula. George E. Belch & Michael A. Belch, Advertising and Promotion: An Integrated Marketing Communications

7 Who Ultimately Pays For The Advertisements? Sellers of product? Through h higher h cost? Buyers of products? Through higher prices? To Answer this question one needs to answer another one: What is the Impact of Advertising on Product Prices? Up? Down? 1669 Impact of Advertising on Prices? On the one hand, advertising creates brands and barriers to entry. This generates higher prices. On the other hand, advertising allows better product comparison and thereby can reduce prices. Therefore, advertising can make prices go either up or down

8 Therefore, Who Ultimately Pays For The Ads? Advertising expense is paid by products buyers-- the more it increases demand the more it makes demand inelastic Therefore, the most successful advertising is paid for by buyers