Can anyone familiar with advertising expenses for a company help me understand this?

A company is not selling the volume it needs to. A car dealership. It's advertising expenses are $200 PNVR (per new vehicle retailed), but the regional average (where the region is doing better with volume than the dealership in question) is $800 PNVR. Obviously, the suggestion is to increase the ad spending, but it also seems like the dealership in question, that is not performing as well, is minimizing it's expenses, which may also be the smart thing. I'm trying to get my head around this. Advertising/business pros, help!!!

A typical move of companies in trouble is to reduce expenses, including in marketing. This works well for about 10 -60 days depending on the industry (the amount of time it takes to close a sale). After that point the loss of business becomes very sharp which will result in more cost cutting which will further reduce sales.

The reason companies cut marketing expenses when sales are soft, rather than increasing the effort, is that the financial officer is more trusted than the marketing manager. Moreover, the financial officer is saying things the owner wants to hear "cut cost by dropping the frills.. like advertising."

Unless your agency gets back up to and exceed the nominal $800 figure it will not survive, pure and simple.

The problem with a "low cost" strategy is that only one company can have the lowest costs. If the company is passing along the $600 in savings to customers AND if $200 PNVR is enough to make potential customers aware of the price advantage, the strategy can work. On the other hand, the old maxim, "you have to spend money to make money" isn't just a cliche. Let's try a little math here...

Company A sells 100 new vehicles per month. At $200 PNVR, the company is spending $20,000 per month on advertising. Company B sells 500 new vehicles per month. At $800 PNVR, the company is spending $400,000 per month on advertising. What will that buy? If you live in Milwaukee (for example), Company A can buy just ONE ad per month in the Milwaukee Journal Sentinel...Company B can buy 26 full page ads in the same newspaper (both would have a little left over for classified advertising of individual vehicles). Given the fact that people don't buy cars on a single day each month and that people don't tend to save newspapers, Company B has the chance to get its name in front of 87% of the people that are looking for information about new cars in the newspaper in a given month, Company A only has a chance to get it's name in front of 3% of that same population...which one do you think will get more business?

Cutting expenses is all well and good until those cuts make it impossible for you to reach your customers when and where you need to reach them. If the industry average is $800 PNVR, then a company that is spending only $200 PNVR should expect to sell AT MOST 25% of what the average company sells in a given month (all other things being equal). If the company also has other disadvantages to overcome (e.g., selling a less popular brand...Toyota sells more cars than BMW, a less convenient or less visible location, crappy sales people, etc...), it will sell even less!

If the company wants to save money, it needs to experiment with different expenditures...try increasing advertising to $400 PNVR and give it enough time to see the results...then look at the bottom line...if the extra $20,000 per month (using the numbers above) yields more than $20,000 per month in profit then increase the spending again. The goal is to find the point at which additional expenditures no longer yield additional profit larger than those expenditures!

...and remember what I said about giving it time...advertising has both short AND long-term effects. The short term effect on sales is one thing...the long-term effect on name recognition is another. ...and if the company does the other things right to make sure customers brought in by new advertising are satisfied, they will enjoy long term benefits of repeat sales and referrals!

The reason the advertising allotment is on each car is for advertising for the dealership. If you want more business advertise more. Companies that reduce advertising because they consider it an expense, are doing the opposite of what they should be doing.

During the depression Kellogg's company-The cereal people- put every extra penny they made into advertising. By the end of the depression, they were still around, and on top while everyone around them went out of business.

Maybe it's not advertising. Maybe they need to do some market research and create incentives to get people to the dealership...
1. Figure out the demographics of the area. What kind of consumers are they, do they buy Toyotas or Fords?
2. Visit the competition, what are they offering
3. Where are people advertising? newspapers, online, radio?

I hear of many who buy their car online buy researching what's available where at what price. it minimizes the haggling and pressure of haggling along with the satisfaction of buying and getting what you want without waiting for it to be manufactured.

Work out a promotional scheme to achieve EMS. Details can be tailor made, as per the needs / requirement of dealership, with or without promotional scheme is sponsored by the company.

Your question seems weird in the sense that you are suppose to be the Advertising Pro isnt it?

Well, as part and parcel of this problem. It would be wiser for you to ask yourself how the current dealership functions. It might provide you some valuable insight of your customer or potential customer.

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