Does Advertising Belong in the Capital Budget?

Abstract

Whether advertising is an investment and so should be treated like other parts of the capital budget is a question of moment to marketing managers. Viewing promotion as an investment could bring dramatic changes in decision-making, market-testing, measurements of effectiveness, and value judgments that are required in determining how much to spend on promotion. The economic case for an investment approach to the advertising budget is the theme of this article by a distinguished economist.

Marketing, Strategic Planning and the Theory of the Firm

“…Thus the decision to introduce a new product, to expand into new territories, or to adopt a new channel of distribution should be evaluated on the basis of its risk-adjusted net present value. While similar approaches have been suggested in marketing (Cravens, Hills and Woodruff 1980;Dean 1966;Howard 1965;Kotler 1971;Pessemier 1966), it has generally not been recognized that this implies the adoption of shareholder wealth maximization as the goal of the firm. Moreover, these approaches are often offered in piecemeal fashion for the evaluation of selected decisions (e.g., new products), and are not integrated into a consistent and coherent theory of the firm.…”

Intangible Resource Values and Tobin’s Q: Evidence from the Super Bowl

“…Joel Dean (1966) argues that most ad spending in economic reality is at least, partly an investment and belongs in the capital budget. Dean's article (Dean, 1966) compares the attributes of advertising with those of an asset and concludes that advertising has asset like characteristics.…”

“…Joel Dean (1966) argues that most ad spending in economic reality is at least, partly an investment and belongs in the capital budget. Dean's article (Dean, 1966) compares the attributes of advertising with those of an asset and concludes that advertising has asset like characteristics. Similarly, Oldroyd (1994) remarks that accounting withholds the power of regulation regarding ads as expenditure and accepts the marketing view of it adding value to a firm's intangibles as long as it can be proven.…”

“…Regarding advertising effectiveness, the marketing literature is clear in suggesting that advertising has a positive impact on a firm's sales, profitability, market value and brand value (, , Abdel-Khalik, 1975;Conchar et al, 2005;Graham & Frankenberger, 2000, Hirschey & Chauvin, 1993, Hirschey & Wayngadt, 1985Keller, 1993;Lambin, 1969;Palda, 1965;Srivatsava et al, 1998;Wang et al, 2009). Furthermore, the marketing literature has long argued the importance of considering advertisements as a capital investment (Abdel-Khalik, 1975;Dean, 1966;Hirschey & Wayngadt, 1985). We argue that due to its enormous cost, Super Bowl advertising must be viewed as a long-term economic investment and the evaluation of the value of this investment might be better quantified utilizing market measures.…”

Pricing ROI, pricing capabilities and firm performance

“…Dean (1966) suggests viewing advertising as an investment, not an expense. As such, it has to be capitalized on the balance sheet, and it should be optimized via ROI and discounted cash flow analysis.…”