Advertising Dilemma

There’s a lot of money in the advertising business and marketers are always trying to find opportunities to sell their company’s brand. Here’s a spin on the old prisoner’s dilemma. Hypothetically, let’s say there was going to be a grand football game and it’s projected to have the largest television audience in the world. Because of the popularity of this game, each advertisement spot costs $10 million.

Imagine you were in Muhtar Kent’s shoes. He’s the CEO of Coca-Cola and you had the final say in whether to advertise or not. Your chief marketing analyst is confident the company can expect to make $12 million in new soft-drink sales if Coke advertises in this upcoming sport event. That’s a pretty good financial outcome because it’s like making 20% return on your marketing equity. However, that is only true if your biggest competitor Pepsi Co doesn’t advertise too. Because if Pepsi also advertises in the same game then both companies are then only expected to make $6 million each in new sales. There is a limited amount of ad spots for the game and time is running out. You’re on the phone with the executives of the football committee and they need an answer from you right away. You don’t have time to call up Pepsi, or find out whether they are advertising or not. But you’re also certain that Pepsi doesn’t know if YOU’RE going to advertise or not and they’re faced with the exact same dilemma.

ko and pep advertising dilemma

 

What would you do in a situation like this? If you say go ahead and if Pepsi does the same then both businesses will lose market capitalization, your personal net worth would take a hit, and other shareholders won’t like how you lost their money by being greedy. If you back down and don’t advertise, and neither does Pepsi, then nobody loses 🙂 But what if Pepsi did advertise ( ・_・)

Coca-Cola Advertises Pepsi Co Advertises Possible Outcomes
Yes Yes Both Companies Lose $4 Million 🙁
Yes No Coke makes $2 Million
No Yes Pepsi makes $2 Million
No No Does not affect either company’s financials

 

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My Financial Independence Journey

Ah, the prisoner’s dilemma problem. I suspect that both companies would advertise, or at least be one step away from pulling the trigger on an ad campaign, just in case the other company starts rolling out one.

More realistically, some institutional share holder will demand that they advertise in order to increase profits without actually thinking the entire situation through. Not that I’ve ever seen institutional shareholders myopically focus on near term gains before….

My Financial Independence Journey

The institutional investors in my employer don’t really seem to understand the company well. They say “You’re not the same as companies X, Y, and Z in this area. Go be like them.” But we’re better off not being exactly like them. We have some strengths that differentiate us. Our products and business model can win in a long-game measured in years, but not in a short one measured in quarters.

Phil
02/22/2013 8:12 am

This is the reason I became and engineer and not a marketer. Now that i am an investor, If i owned CC, then I would expect Mr.Kent to challange his staff for any future grand event, to have a better plan to not have this issue, and find a better way to use my money to generate income and growth, and to have exclusive arrangements pre-arranged for events of these kinds, or inovative marketing campaigns that corespond to the timing of such future events… Cheers.

Alex Yang (@yyangalex)
Alex Yang (@yyangalex)
02/23/2013 11:39 pm

if one company does not advertise, they will lose market share if other does, and the cost of not advertising isnt simply the competitor making some money on new sales while you dont, but rather the company itself also losing existing sales, and profits. thus the decision comes down to protecting the brand’s market share. and the cost isnt a cost of obtaining new incremental sales, but an operating cost that protects existing sales, which makes it vastly profitable and justifiable

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