In advertising, businesses tend have higher promotion budget and spend more money when the economy is booming. And, have lower promotion budget and spend less money when the economy is in recession.
Economic trade cycle refers to the alternating periods of expansion and contraction in the economic activity.
How does advertising affect sales?
Increased advertising expenditure is supposed to increase sales by increasing customer awareness of the product or brand, stimulate interest and persuade the customer to buy the product.
On another hand, decreased advertising expenditure is supposed to decrease sales.
The rate of increase or decrease in sales usually depends on several other factors such as market saturation, competitors’ actions, changes in consumer taste, disposable income, TAX levels, etc.
How does advertising impact profit?
Any increase in advertising spending and increase in sales does not necessarily guarantee an increase in profit. The effect on profit depends on whether sales were higher or lower than advertising cost.
Firstly, when an increase in sales is greater than advertising expenditure, profit should increase.
Secondly, when an increase in sales are lesser than advertising expenditure, profit will decrease.
Firms will need to justify the cost of marketing by potential to earn profits.
What does spending less on promotion mean?
In general, advertising is the most needed when the product is first introduced to the market, when sales are beginning to slow down or even decline due to economic forces.
While decreasing advertising expenditure can save costs during a recession, maintaining the advertising levels could still encourage consumers to buy the product. Even if household incomes are restricted during an economic downturn. So the choice is not easy.
Finally, the important concern for marketing managers is how to establish promotional budgets in order to increase sales and maximize profit for the business.
