Impact of advertising on financial performance of a business
In modern world, billions of dollars are being spent on the advertisement and marketing. Mega industries such as Coca Cola, Pepsico, Amazon, Mercedes, etc., have marketing budget that are more than the overall revenue of many organisations. The following report highlighted the impact of advertisement and promotions on the financial performance of the company. An analysis was carried out, wherein both positive and negative impacts had been elucidated and their likely impacts had been outlined with respect to e-retailing giant- Amazon. In addition to this, some recommendations were also enlisted for the company in the end of the report.
Advertising is one of the crucial business operations for every organisation, especially the online retailers. It is aiming at turning a potential buyers into a profit. There is a complex relationship that exists between advertising and profits of an organisation as it contributes to the profit but on the other side, excessive advertising might cost a huge fortune to the business. In this report, an analysis of how advertisement impacts the financial performance of a company. For better understanding, Amazon has been selected. The business problem and benefits of the advertising are outlined along with the recommendations.
Amazon is one of the leading online retailers in the world that was founded in the year 1994 in Seattle, Washington. The company initially started with selling online books but later on, it started selling software, video games, apparel, food, jewellery, furniture, etc. In 2018, the net income of the company was US$ 10.073 billion. The total expenditure on advertisement in 2018 was US$8.2 billion. This is 81% of the total profit gained by the company (Amazon, 2019). Hence, if this expenditure increases beyond a sustainable limit, then organisation might face certain consequences. The SWOT of the organisation is provided here in order to get better insight into the firm.
· Gain competitive advantage on the basis of better focus, cost leadership, and product differentiation.
· Amazon derives its strength from leveraging its advance Information Technology (IT) solutions in e-commerce
· High brand value and goodwill help the company to enter new markets easily
· Advance distribution systems and logistics that helps the company to serve its customers in a better way
· Company is too focused on expanding into new market that it is ignoring its key competitive areas
· Free shipping policy is affecting its profit margins
· The company works on near zero margin corporate model that negatively impact the profits regardless of high revenue or sales.
· Providing more options in online payment can scale up the online sales.
· Improving its IT infrastructure in order to provide personal data security to the clients and customers can build the trust
· Increasing the portfolio in order to target new markets with better delivery services
· Expanding the organisation’s global footprint by acquiring local firms.
· Hacking and other security issues might impact the online sales
· As consequence of its aggressive pricing strategies, the company is facing many lawsuits filed by rival retailers and publishers.
· Diminishing focus from local market while exploring the international opportunities.
The marketing experts of amazon are aware of increasing the return on investment for the shareholders. Many researchers have identified that there is some relationship between the two factors. No doubt advertising and promotion are very much important for the success of Amazon in local as well in international market but there are some downsides to this as well. According to Ataman, et.al (2010), company pays the advertising expenses from its revenue only. This reduces the net profit of the company. In order to increase the ROI on advertising, the company would be charging a higher prices from its customer. This might jeopardise Amazon’s competitive position in the market. As one can see in the SWOT analysis that Amazon usually beats its rivals through its cost leadership. Large amount of advertising expense may force the company to increase its service charge and that might further cost a fortune to Amazon.
Tuli, et,al (2012) believe that while covering up the market, advertisement seems to be the best way to disseminate useful information to the people. However, usually this approach ends up impacting the business profitability in a negative way. This is the common mistakes that online retailers like Amazon make. Spending more and more on advertising in order to increase sales without identifying the right media and platform may result in poor bottom line of the business. Advertising helps the businesses like Amazon to gain only a small section of the customers for which they spend huge amount of money from their revenue. This section of customers may not add the same or more value to the overall revenue of the company.
Chadha& Sharma (2015)argue that less forceful advertisement may not be able to fulfil the main objectives of the Amazon. Many people usually donot pay attention to the key message of the ads. Also, measuring the effectiveness of the advertisement is very difficult there are no such direct methods for doing so. Hence, Amazon may not be able to measure the ROI on advertisement. This may result in overspending and reduces the profitability of the firm. However, all the aforementioned points are coming from one school of thought that criticise over expenditure due to ads. Majority of the business experts believe that advertising is always beneficial for the online retailer in expanding their business and growing their revenues.
Benefits of Advertising
In the previous part of the report, the criticism of the ads run by Amazon and similar e-retailers is discussed. This section talks about the positive aspect of the business. According to Kalpana, (2017), advertisement helps in establishment of the business and building the brand image. Amazon is the leading e-retailer and advertisement has greatly helped the company in expanding locally as well as globally. In addition to this, businesses can grow and increase the presence in a particular market segment without losing the existing customers. Advertisement campaigns can help in highlighting the current offers and upcoming sales and customers can select what they want prior to the main event. Chadha& Sharma (2015) believe that promotions and advertisements are the important tools that can improve the customer loyalty. Amazon understands that retaining the customers are more important while gaining a new one. The cost of gaining a customer is five times than what it costs for retaining an existing customers (NYi&Yim, 2014). In this way, advertising can help retaining the customer by increasing customer loyalty. Also, the most important benefits of advertisement is that it helps in combatting the rivals in the market. It can be an effective tool in beating the competition. If the competitor conduct a sale, then Amazon can be able to counteract the attention of the potential customers by running an ad of its own discounts, thereby keeping the customer loyal with the brand.
- Customer centric marketing approaches can help Amazon in reaching more customers with lesser expense. This type of advertising is very effective in reaching one customer at a time and can further be promoted with the help of word of mouth (Tuli, et,al, 2012).
- Pre-sale programs can also be beneficial, wherein the loyal customers can get extra discounts on upcoming sales based on their purchase history and how frequently they shop from Amazon (Kalpana, 2017).
- Instead of spending more and more on advertisement, it should focus on providing loyalty credits or rewards to the customers. This would help the company to retain its customers, thereby serving them in a cost-effective way (Chadha& Sharma, 2015).
- Company can organise social events for noble cause that would improve company’s image in the society and this would improve the sustainability of the company in the market (Kalpana, 2017).
- (2019). Retrieved 8 August 2019, from https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec
- Ataman, M. B., Van Heerde, H. J., &Mela, C. F. (2010). The long-term effect of marketing strategy on brand sales. Journal of Marketing Research, 47(5), 866-882.
- Chadha, S., & Sharma, A. K. (2015). Capital structure and firm performance: Empirical evidence from India. Vision, 19(4), 295-302.
- Kalpana, R. (2017). Advantages and Limitations of Advertising. Retrieved 8 August 2019, from https://www.businessmanagementideas.com/advertisement/advantages-and-limitations-of-advertising/2263
- NYi, H. U., &Yim, B. J. (2014). An Empirical Study on the Relationship between Advertising Expenditures and Sales in the Korean Liquor Industry, 19(1), 77-88.AB
- Tuli, Mukherjee, &Dekimpe. (2012). On the Value Relevance of Retailer Advertising Spending and Same-store Sales Growth. Journal of Retailing,88(4), 447-461.