Advertising, Crocodiles And Moats

By Jim Mueller AAA

The best companies in which to invest are those with sustainable competitive advantages, also known as "moats". The deeper and wider the moat, the more likely it is that a company can continue to sell its products, raise prices and increase earnings. The best companies do everything in their power to keep their moats deep, wide and filled with crocodiles in order to keep their competitors at bay.

TUTORIAL: switching costs. However, once the moat is built, it must be maintained - otherwise competitors will be rolling down the drawbridge in no time. Although there are many strategies for maintaining an economic moat, one way to do it is by creating brand awareness. In this article we discuss how advertising works to fortify a company's competitive advantage. (For further reading, see Competitive Advantage Counts.)

Program Interruptions and Memorability
Advertising can serve several purposes. The following is not a complete list, but it does bring out several points. First, it can introduce consumers to a new product. Second, it can strengthen their memory of a particular product or company. Third, it urges them to perform an action, such as "buy this product" or "buy from this company". Wal Mart has spent a fortune to ensure that consumers remember that it is the low-price retailer. Even Wal Mart trucks promote this key message. The only way that consumers can be made to perform a particular action is if they recognize and remember the action associated with a particular advertisement. Memorability, therefore, is a key factor in effective advertising.

Try the quiz below. What products and companies go with the following?

A. "Priceless"
B. Mean Joe Green's sweaty jersey
C. "It keeps going and going ..."
D. An idyllic drive through the countryside

Because of the advertisements cited above, you might be more likely to use a Mastercard to buy items at the local grocery store, grab a Coke when you are thirsty and hope that your flashlight holds Energizer batteries. These ads are designed to bring particular products to mind in particular situations. The very fact that most people can easily conjure up the products that go along with advertisements A through C from that brief reminder shows that these advertisements were effective.

The idyllic drive through the countryside represented in choice D, however, could conjure up a GM Cadillac DeVille, a Ford Crown Victoria or a BMW 750i. Consumers might associate the setting with a luxury car, but because such an ad is not linked to a particular company or model, it lacks memorability. In other words, a company using such an ad may have failed in moat construction.

What is the last memorable car advertisement you remember? Often, these ads are not memorable enough to be considered effective, but have you ever seen the one showing how a single rolling cog sets off a chain reaction of moving parts, which eventually leads to a Honda Accord rolling off a platform? The two-minute commercial received plenty of press, and the U.K.'s Telegraph even referred to it as "a classic", showing how a uniquely appealing commercial can create consumer awareness of a particular product. (You can check out this memorable Honda advertisement at Boards Online.)

Effectiveness and Measurement
A good advertisement should stick in the potential customer's mind and help shape his or her behavior. But an ad can also go too far in that direction, as might have happened with Mastercard's "priceless" series. When the use of a phrase such as "priceless" enters the common lexicon, its ability to bring the product - in this case, Mastercard - to mind is diminished. The same thing can happen when a brand or company name becomes synonymous with the generic product, as is the case with Xerox, Kleenex and Scotch Tape.

The effectiveness of an ad is especially important when the product itself is a commodity and there is little to distinguish one brand from another. Examples include laundry detergent, soft drinks and even cars. In the case of a commodity product, an effective advertisement campaign can help to drive customers to a specific brand, even though the underlying product can be purchased from many companies. For example, a consumer may be loyal to Bounce dryer sheets, even though the no-name brand next to it does the same job for half the price.

Because brand loyalty is so crucial, measuring advertising's ability to create it is crucial for a company, especially a company selling commodities. Measurement techniques include telephone surveys, purchase tracking at various households and purchase habit databases. Purchase databases have arisen from the growth of scanners and computers at retail locations and "loyalty" or "discount" card memberships. When the product is scanned, not only is the price displayed at the register, but the identity of the product is stored in a database along with what else you are buying, what you have bought in the past, how often you have bought it and your demographic information. According to Knowledge Networks, approximately 75% of U.S. households belong to one or more loyalty programs, providing a huge source for this kind of data.

The information collected by the various measurement techniques is used to analyze the effectiveness of any given advertising campaign. Just like anything else in business, the return on investment (ROI) must justify the cost, which in this case is the advertisement itself. If an advertisement doesn't cause consumers to buy more of the product, the ad campaign has been unsuccessful. An example of a successful ad program was Frito-Lay's "Share Something Good" campaign, which, according to the company's 2005 annual report, contributed to single-digit growth in Frito-Lay's sales in 2005 over 2004 and made the company the runner up for the David Ogilvy Award Honoring Advertising ROI in 2006.

Conclusion
A successful advertising campaign will contribute to a company's moat, expand its competitive advantage and keep the brand in the consumer's mind. The most effective ads urge customers to buy a particular brand or product by setting up an association between a product type or product situation and a particular brand. The next time you see an advertisement on television, in a magazine or online, don't breeze right by or tune it out. Instead, consider the purpose of the ad, whether it accomplishes that purpose, and whether it would make someone do something desirable from the company's viewpoint. If you are a company shareholder and are particularly struck by the ad, let the company know. The investor relations department would certainly love to hear from you and make sure that the right people in the company get your feedback. You could end up doing something positive for the company you own.

Read more about moats and other finance terms inspired by medieval times in Bloodletting And Knights: A Medieval Guide To Investing.

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