| Abstract: |
Managers often count on advertising to create and reinforce brand
differentiation, which should, in theory at least, translate into lower price
sensitivity for their brands. But to what extent does it do so, what is the
route through which this effect of advertising materializes, and what are the
boundary conditions? The authors develop a Dynamic Linear Model that links
advertising to brand price elasticity directly and indirectly through
consideration and main brand preference mindset metrics. Model estimation on
six and a half years of data, on average, for 350 brands in 39 categories of
fast-moving consumer goods shows that advertising indeed decreases the
magnitude of price elasticity. The effect is mainly direct (97.5%) and partly
indirect (2.5%), through brand preference. The direct effect shows that
advertising predominantly decreases price sensitivity among the consumers who
already consider the brand and among the consumers who already prefer it. When
converted into incremental revenue impact, monetary gains from this increased
pricing power are especially pronounced for expensive brands in complex and
frequently purchased categories. The findings thus help managers demonstrate
the benefits of advertising in sustaining brand performance. |