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A new theorem for optimizing the advertising budget

Author

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  • Wright, Malcolm

Abstract

This paper reports a new theorem and proof for optimizing the advertising budget. The theorem is that the optimal rate of advertising is equal to gross profit multiplied by advertising elasticity. This does not involve a ratio of elasticities, and so is an advance on the Dorfman-Steiner theorem that has dominated this topic for the last 50 years. The elegant nature of the proof makes it especially suitable for managerial economics textbooks. The simple nature of the theorem means that it is easily adopted, by both large and small businesses, in place of heuristics such as industry advertising to sales ratios. From meta-analysis, the mean advertising elasticity is .11. Therefore, in the absence of any other information, companies should spend 11% of gross profit on advertising.

Suggested Citation

  • Wright, Malcolm, 2008. "A new theorem for optimizing the advertising budget," MPRA Paper 10565, University Library of Munich, Germany, revised 15 Sep 2008.
    • Handle: RePEc:pra:mprapa:10565
    as

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    File URL: https://mpra.ub.uni-muenchen.de/10565/1/MPRA_paper_10565.pdf
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    References listed on IDEAS

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    1. Stacey Brook, 2005. "Is the Dorfman-Steiner Rule Always Optimal?," The American Economist, Sage Publications, vol. 49(2), pages 75-77, October.
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    Cited by:

    1. Yuri Peers & Harald J. van Heerde & Marnik G. Dekimpe, 2017. "Marketing Budget Allocation Across Countries: The Role of International Business Cycles," Marketing Science, INFORMS, vol. 36(5), pages 792-809, September.
    2. Pauwels, Koen & Demirci, Ceren & Yildirim, Gokhan & Srinivasan, Shuba, 2016. "The impact of brand familiarity on online and offline media synergy," International Journal of Research in Marketing, Elsevier, vol. 33(4), pages 739-753.

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      More about this item

      Keywords

      Advertising; Optimization; Budgeting; Theorem; Proof;
      All these keywords.

      JEL classification:

      • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
      • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
      • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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