why it is incorrect to advertise up to the point that the last dollar of advertising generates another dollar of sales? What is the correct rule for the marginal advertising dollar ??
That last dollar sale of some item; didn't it cost anything to create the item? Note the difference between sales and profit.
It is incorrect to advertise up to the point that the last dollar of advertising generates another dollar of sales because it does not account for the principle of diminishing returns. The marginal advertising dollar refers to the additional unit of money spent on advertising and its impact on sales. The correct rule for the marginal advertising dollar is to allocate it until the marginal cost of advertising equals the marginal benefit.
To determine the optimal level of advertising spending, you can follow these steps:
1. Measure the impact of advertising: Analyze historical data and conduct experiments to understand how changes in advertising spending affect sales. This will help you estimate the relationship between advertising and sales growth.
2. Calculate the marginal cost: Determine how much it costs to produce one additional unit of advertising. This includes the cost of media space, creative development, production, and any other associated expenses.
3. Calculate the marginal benefit: Estimate the additional revenue generated by each additional unit of advertising. This can be derived from historical data or using statistical models that account for various factors affecting sales.
4. Compare the marginal cost and benefit: Compare the marginal cost and marginal benefit to find the point of equilibrium. The optimal level of advertising spending is where the marginal cost of advertising equals the marginal benefit. At this point, you are allocating your advertising dollars in a way that maximizes return on investment.
By adhering to the principle of marginal analysis, you can avoid overspending on advertising and ensure that each additional dollar spent is generating a positive impact on sales.