Measuring the Productivity of Investment in Persuasion

Abstract

i. Much advertising (and other corporate persuasion) is in economic reality partly an investment. The investment-mix varies over a wide spectrum. 2. Investments in promotion are different from conventional capital expenditures, but their peculiar traits do not disqualify promotion from investment treatment. 3. Profitability must be the basic measurement of the productivity of capital invested in promotion. Despite the multiplicity of conflicting corporate goals, the overriding objective for decisions on investment of corporate capital should be to make money. 4. The main determinants of profitability of an advertising investment that need to be estimated are the amount and timing of added investment and of added earnings, the duration of advertising effects, and risks. 5. The measurement concepts of capital productivity that must be estimated are future, time-spotted, incremental, after-tax cash-flows of investment outlays and of added profits from added sales. 6. Discounted Cash Flow analysis (DCF) supplies the yardstick of investment worth which is most appropriate for promotional investments. By comparison, payback period, though widely used, has no merit. 7. Advertising belongs in the capital budget. Promotional investments should be made to compete for funds on the basis of profitability, i.e., DCF rate of return. 8. The criterion for rationing scarce capital among competing investment proposals should be the DCF rate of return. The minimum acceptable return should be the corporation's cost of capitaloutside market-cost or internal opportunity-cost, whichever is higher. 9. Plopping advertising into the corporation's capital budget will not perform a miracle. The most that it can do is to open the way for a research approach which is oriented to the kind of estimates that