CONTENTS

A Bigger Bang for the Milk Advertising Buck?

Evaluating Returns to the Cotton Checkoff Program

Editor's Notes

Manager's Viewpoint

Director’s Corner

Next Meeting

NEC-63 Fall 1997 October 6-7, 1997 Washington, DC A Symposium to Examine the Effectiveness of Different Nutrition Education Programs

A Bigger Bang for the Milk Advertising Buck? *

by James G. Pritchett, Donald J. Liu, and Harry M. Kaiser

“Got Milk?” Who hasn’t been tempted by the image of a frothy glass of milk and a plate of chocolate chip cookies? And everyone knows “milk does a body good.” Whether broadcast nightly into your living room or printed in a magazine, these recurring images are courtesy of a producer-supported, national dairy promotion program. U.S. dairy farmers, through their promotion organizations, have increased fluid milk demand and improved retail prices through such advertising. But are producers getting the biggest bang for their advertising buck?

The national dairy promotion program finds its roots in the Dairy and Tobacco Adjustment Act (1983) which authorized the current assessment of 15 cents per hundred pounds of milk marketed in the continental United States. Totaling about $200 million per year, the assessment funds activities such as nutrition research, education, promotion, and fluid milk advertising. The funds earmarked for generic milk advertising have changed over time. On average, $20 million per year (discounted to the value of a dollar in 1982) is spent on generic milk advertising, with spending generally increasing over time. A 1997 study by Kaiser found the advertising of dairy products increased milk demand by 2.14 percent. The increase improved farm milk prices by 2.9 percent.

Advertising dollars are spent on four distinct media outlets--television, print, radio, and outdoor (e.g., billboards). These advertising expenditures are not spread evenly across all outlets; rather, television receives more advertising dollars per quarter than the other media outlets combined. On average, television receives 89 percent of the advertising budget while print receives 5 percent, radio has 4 percent, and outdoor receives 2 percent. The reason for the bias toward television has to do with consumer response. Some media outlets engage the consumer more quickly and the advertising message may be retained longer. This is true for television relative to other media outlets, which is why it receives so much of the advertising budget.

The relative effectiveness of the various modes of advertising may be estimated using an economic simulation model. This econometric model relates the amount of fluid milk sold in each quarter to important factors affecting milk demand including the retail price of milk, consumer income, price of milk substitutes, and, in particular, the amount of television, radio, print, and outdoor advertising. By relating the demand factors to fluid milk sales, the econometric model can approximate net percentage changes in sales for a given amount of change in television, radio, print, or outdoor advertising expenditures. For an additional 1 percent allocated to television advertising, fluid milk demand increases by 0.0022 percent or roughly 299,000 pounds in a quarter. In contrast, print provides only a 0.0004 percent increase, radio a 0.0003 percent increase, and outdoor a 0.0006 percent increase, per 1 percent increase in their respective advertising expenditures. At first glance, television is the most effective media outlet, followed distantly by the other three options.

While it has the greatest impact, television has been overused in dairy advertising. Although it has the largest advertising response to a 1 percent increase in expenditures, television’s expenditure base is substantially larger than that of other advertising modes. For instance, between 1984 and 1993, a 1 percent increase in advertising expenditures (in 1982 dollars) was the equivalent of $33,000 per quarter for television, $2,000 for print, $1,600 for radio, and $900 for outdoor. A 1 percent increase in television advertising would have required an investment that was 16.5 times larger than the same increase in print advertising. Since the advertising responsiveness of television is only 5.5 times larger than that of print, reallocation of expenditures from television to print would clearly be profitable. This crude simple analysis also applies to potential reallocations between television and other media. To determine the exact extent of the optimal reallocation requires a more sophisticated computation, as was done in our research. Intuitively, as expenditures are added incrementally to a particular advertising mode, less and less is gained from subsequent exposure because of the principle of diminishing marginal returns. This means that the most profitable approach to advertising is a diversified one--funds should be distributed among different media types in an optimal mix so that returns can be maximized.

How might the optimal mix of advertising be determined? Once the relationship between demand factors and fluid milk sales has been estimated, we can then consider how the milk supply responds to changes in fluid milk sales. An increase in fluid milk sales leads to higher prices, and higher prices encourage more milk production. The increased production is a supply response. A second econometric model quantifies the supply response by relating important supply factors (like fluid milk price and cost of production) to the amount of milk produced in each quarter. The resulting supply and demand estimates become important components of an optimal control model. The goal of the optimal control model is to achieve the greatest discounted profits (fluid milk sales minus advertising expenditures) for a given time period. To do this, the optimal control model adjusts the advertising expenditure level of each media outlet incrementally while staying within the advertising budget. Information on supply and demand is used to determine the amount of fluid milk sold, the price of milk, and profits. In this manner, the model can control both the level of estimated demand in each quarter and the subsequent estimated supply response. Ultimately, the optimal control model arrives at an advertising mix that maximizes profits for a given time period.

What is the optimal mix of advertising? On average, the best mix of funding is found when television receives 70 percent of the advertising budget--down from the previously mentioned 89 percent. Outdoor spending increases from 2 to 15 percent, radio grows from 5 to 6 percent, and print changes from 5 to 9 percent.

What would a switch to the optimal advertising mix mean to dairy producers? Suppose we go back in time to the period 1984-1993 and switch from the typical mix of advertising to the optimal one. Milk demand increases in each quarter with the switch. Both the typical and optimal advertising mixes share the same “high” and “low” demand quarters. These peaks and valleys reflect the seasonal nature of consumer demand. Yet, demand from the optimal advertising mix is greater than the typical advertising mix. Had this extra milk been sold, dairy producers would have made an additional $265 million for the period, or about $29 million per year. Furthermore, the switch could have been achieved for virtually no cost--it would have simply been a matter of putting the right funds in the right place.

Clearly, dairy promotion programs influence the amount of fluid milk consumed in the United States each year. Television is by far the most effective media outlet--its effectiveness is easily three times that of alternatives. But the possibility of having too much of a good thing exists--the effectiveness of television is subject to diminishing marginal returns. To get the biggest bang from the milk advertising buck requires an optimal mix of media outlets. Our research shows that switching from the typical advertising mix to the optimal mix is worth an additional $29 million per year to dairy producers.

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* The economic model used in this study is currently being refined. Consequently, the results reported here may be somewhat different than those reported in the future due to minor modifications.

Data for this article is from the Leading National Advertisers and USDA Dairy Situation and Outlook.

James G. Pritchett and Donald J. Liu are graduate research assistant and assistant professor, respectively, in the Department of Applied Economics, University of Minnesota. Harry M. Kaiser is an associate professor in the Department of Agricultural, Resource, and Managerial Economics, Cornell University, and is also the director of NICPRE.